Applying for a loan can be a difficult and strenuous process. Since its creation in 1949, the United States Department of Agriculture (USDA) has worked to assist low-to-moderate income households to find affordable housing. Using USDA Loans, qualified borrowers can live comfortably in safe and modern housing.
Types of USDA loans:
The USDA Rural Development Loan program provides mortgage loans for eligible rural and suburban homebuyers with low-moderate incomes. There are a variety of USDA Loans, each administering the best loan plan for qualified borrowers.
Guaranteed loans are the most popular type of USDA loans. Guaranteed loans cater to average income households. To qualify as an average income household, applicants must have an income up to 115% of the median household income of their surrounding area. Read more about USDA income breakdowns for guaranteed loans.
Guaranteed loans allow buyers to redeem the lowest mortgage interest rates without a down payment. Without a down payment, the premium for mortgage insurance is paid out up front. Additionally, all guaranteed loans are 30-year terms with a fixed rate. Guaranteed loans include costs such as lender fees, renovation and repair costs, closing costs, and guarantee fees in the loan amount.
Direct Loans, also known as the Section 502 Direct Loan Program, are only available for low to very low-income households considering purchasing a home. While income breakdowns vary by state, a low income is defined as 50% less than the median household income. Read more about USDA income breakdowns for direct loans. Additional qualifications include demonstrating a good credit history and the ability to pay monthly mortgage payments to the USDA.
Direct loans have repayment options varying from 33 years to 38 years with USDA set interest rates. The USDA payment assistance is a subsidy, a government payment reducing the borrower’s mortgage payments for a short period of time.
Eligibility For USDA Loans
To be eligible for USDA Loans, borrowers must meet certain parameters such as household income and USDA approved property. Check the Income and Property Eligibility Criteria to see if you qualify for USDA Loans. The USDA loans look at the total household income. If the total income, including spouse and children above 18, exceed the USDA maximum, then you are not eligible for a USDA Loan.
USDA loans are only applied to homes purchased in USDA eligible property areas of the United States. Find if your area is eligible for the USDA Property Eligibility map. The USDA eligible properties are defined as “open country” and with populations less than 10,000 people (or 20,000 in areas with a lack of mortgage credit).
After checking your eligibility, contact an approved lender in your area to start the mortgage process. Approved USDA lenders can be found here. Lenders will walk you through the journey to homeownership. Check out the USDA information user-guide to learn more about USDA loans and purchasing a home.
Steps to Applying for a USDA Loan:
Pre-qualification provides your lender with your approximate credit rating, values of the eligible homes, current income, and any assets. This is a helpful step to overcome any potential roadblocks in your application.
Maintaining a good credit score is beneficial during the loan process. While USDA is flexible with credit; good credit scores will speed up the pre-qualification process.
Debt-to-income (DTI) ratio is another factor considered in the pre-qualification process. Debt-to-income is a percentage of your income that goes towards paying all the bills. For USDA loans, standard debt-to-income ratios are typically 29/41.
2. USDA Pre-Approval
Once the lender estimates viable housing options, they will take a more detailed look at your finances. This step includes considering current pay stubs, tax returns and W-2, employment history, evidence of stable compensation, and any banking or investment statements. It is wise to keep all your documents handy for the pre-approval process. The more you work with the lender, the easier and quicker the process.
Being pre-approved for a mortgage does not guarantee a USDA loan. There are often certain conditions, such as not taking on any new debt or credit, stated on the pre-approval letter. Furthermore, the pre-approval letter will also detail purchase pricing, interest rates, and other information to improve the home purchasing process.
3. Making an Offer
In this step, work with your real estate agent to present your newly secured home to your lender. The real estate agent will prepare your offer, ensuring that seller pays the closing costs– maintaining a zero down loan. The buyer and the seller negotiate the closing costs and various other fees. However, if negotiations are at a standstill, USDA loan programs are also an option. The USDA allows gift funds from family or non-family members to pay for closing costs.
Once an offer is accepted, an inspection is arranged to ensure the property meets USDA Home Loan standards. If the home doesn’t meet these standards, the seller must fix the issues before closing.
This is agreed upon through an addendum to the contract detailing existing problems. It provides specifics necessary for the seller to fix the repairs such as what issues are being repaired, who will do it, and how they will be verified.
After the inspection, the home is cleared for USDA financing, thus starting the closing process. An underwriter will review your information, ensuring no any major changes since the beginning your application process. If successful, the loan will be officially approved and a closing date will be scheduled. At closing, all the paperwork is signed and the keys are handed over.