Don’t we all dream of having a house of or own someday? Perhaps the same dream house we imagined when we started saving. Buying a home is no doubt one of the heaviest financial investments an individual ever makes in their life – but also the most exciting one.
A home is much more than a monetary investment of your life-long dream, but it’s a step towards making your American Dream come through! This is where USDA plays a very important and large role in your decision to buy a home.
The entire loan process to get a USDA loan isn’t much different than most loan programs, but USDA does come with a few significant exceptions. This is simply because USDA has the government’s guarantee.
Let’s dig in to find out more about the loan application, process, and eligibility.
You can thank us later!
Table of Contents
How Does USDA Loan Work
The very first step in getting a USDA loan is locating an approved USDA lender. Hundreds of USDA lenders make the loans but be mindful that some of these lenders might only make a couple of loans every year.
Working alongside a USDA lender who has expertise in this rural home program will make a significant difference for any homebuyer. The next step after you’ve managed to choose a lender is to get prequalified.
The pre qualifying stage for a USDA loan is simpler than it looks. When you get prequalified, you’re provided with a basic estimate of what you can afford, and if you meet the eligibility criteria of the program.
This important step will eventually save you a good amount of time and effort as it’ll narrow down the homes you might be able to purchase. Do note that your lender will want to discuss how much you are able to afford, and further alter you if any red flags are binding you from qualifying for a USDA loan.
USDA Loan Application
Before you start your loan application, the USDA lender will ask many questions related to your financials. Your financials are the one thing the lender will ask about. Be prepared to be thoroughly questioned about them, which is why you need to study and understand your financials first.
Here are some questions you will likely be asked:
- How much are you wanting to borrow
- Monetary debts
- Your monthly income, and other assets that contribute to your income
Most lenders will want to conduct a hard credit inquiry during this process, but of course, not without your permission. Prequalifying for a USDA loan will allow you to identify any debt, common income, or credit issues that could cause a hindrance in closing your loan.
USDA considers four separate income calculations when identifying a borrower’s income eligibility. Hence, why the prequalification stage is the perfect opportunity to have an overview of all your income sources that are qualifiable.
USDA Loan Pre Approval
Pre Approval comes after the pre qualification stage. It is a much more thorough process, in which your actual and current financial situation will be taken into account, instead of the estimations calculated.
In this step, your USDA lender will do a verification of the information you provided about your finances and income. These are some of the most commonly asked documents your lender will require during the preapproval process:
- Pay stubs
- W-2’s and tax returns
- Photo ID
- Social security awards letter
- Bank statements
When you’re in the pre approval stage, the USDA lender will be able to determine just how much are you eligible to borrow, by doing an income verification and further concluding your debt-to-income (DTI) ratio. This will show the amount that will be going towards the expense via your monthly income.
USDA lenders are more than likely to look at two different types of DTI ratios:
|Front-End Ratio:||Back-End Ratio:|
|Contains just the new housing expense, per your gross monthly income.||Covers all major monthly expenses per your gross monthly income.|
Lenders hope for a 39% ratio for your front-end ratio and a 41% ratio for your back-end ratio, for your USDA loans. However, both caps on DTI ratios and guidelines can vary from one lender to another, as well as other factors in the entire process. In other words, it is possible for you to still qualify for a USDA loan if your DTI is higher than these benchmarks.
Getting preapproved is a very important step for a homebuyer. Realtors and home sellers look forward to receiving offers that come in from pre approved buyers. Therefore, if you have a preapproval letter with you, it shows the home seller how much of a serious and strong contender you are.
However, it’s vital to understand that getting preapproved does not guarantee that you’ll be granted a USDA loan. These are mainly supplemental conditions that need to be established to receive final approval. You also require a positive appraisal and further employment and income verification might be needed.
Finding a USDA Approved Home
If you have yet to find a USDA approved home, you need to get a real estate agent with the right amount of expertise to begin your house hunting with. As we shared earlier, a real estate agent who has experience with USDA loans is more likely to help you big time in navigating the housing market, to locate homes that have the eligibility for USDA funding.
USDA requires that all of these properties ought to be located in a competent “rural” area. Moreover, this particular property has to be able to serve as your primary residence, meet the rest of the property terms, conditions, and requirements established by the lender, and USDA itself.
Having had your pre approval letter, and the understanding of the area that meets the eligibility for a USDA loan, both your agent and you should not have any hurdles in acquiring your dream home.
The Signing of Purchase Agreement
Once you’ve found your dream home, you’ll work side-by-side with your USDA lender and realtor to work out an offer. This is no doubt the best time to negotiate with the home seller about having to cover some if not all of your closing costs.
Once both the seller and you have successfully signed the purchase agreement, your USDA lender will start processing your loan appraisal. Do understand that appraisals are quite different from that of a home inspection, and are a mandatory requirement by USDA as a security to the homebuyer.
The appraiser will do his/her research to be certain that the home is move-in ready, and that the particular property meets and abides by USDA standards. In any case, if one thing or another doesn’t meet the standard, the issue has to be fixed before closing.
Processing and Underwriting
Once under contract, your information will be reviewed and your file will be examined to confirm that both your documentation and application consist of no inaccuracy and dishonesty. Understand that the entire underwriting process for the loan can take a longer time as compared to traditional mortgages because USDA makes use of a two-party approval system.
Your USDA lender has to underwrite the file to ensure that all the information goes side-by-side with all of the USDA requirements. After that, USDA will want to underwrite your file, which could be done manually or automatically.
You need to have a credit score of at least 640 to be eligible for GUS, which is their automated system. Once the underwriter is positively satisfied, you’ll then be able to move forward to your final step, the closure of your USDA loan.
USDA Loan Closing
Once both the lender and USDA approve and sign on your loan file, you’ll then receive a Clear to Close you can head towards the closing day. During the closing, you’ll then sign on all of the required paperwork, confirm your loan, and at last, take the rightful ownership of your brand new home.
USDA Loan Calculator
USDA Loan Calculator: https://themortgagereports.com/usda-loan-calculator
The image above is that of the USDA loan calculator. You should be able to establish just how much of a loan amount you are eligible for. Often, buyers are unaware of why these costs exist. Hence, we’ve listed the definition of each cost in the table below:
|Principle and Interest||Amount made in the paying off of the loan + interest accumulated each month. This is a constant amount until your fixed-rate loan is paid off.|
|Property Tax||Tax amount charged per year according to your states’ regulations. This payment is to be made in 12 installments, each year|
|Homeowners Insurance||You’re required to insure your home from fire and other mishaps. The fees will be collected with your mortgage payment.|
|HOA/Other||If you’re purchasing a condo or a house in a Planned Unit Development (PUS), you might have to pay homeowners association (HOA) dues. USDA lenders will include this cost when calculating your ratios.|
|USDA Mortgage Insurance||You’ll be charged an annual fee annually, split into 12 installments by the agency, alongside the mortgage amount. The fee is equivalent to 0.35% of the yearly loan amount.|
|Upfront USDA Fee||An upfront fee will be charged by USDA, included in the loan amount. This is currently 1.0% of the loan.|
|Loan Term||USDA offers a 15 or 30 years loan payoff time.|
|Down Payment||This would be the dollar amount put forward for your home cost. USDA doesn’t require a down payment, but homebuyers can opt to do so if they want to.|
|Interest Rate||The amount of mortgage rate charged by your lender.|
We’ve established that the USDA loan process is a lengthy one after all. However, with the benefits and higher reliability of the professionalism of the USDA loan, the wait is worth it. We’re sure most of you out there have asked yourselves, “can I qualify for a USDA loan?”, well we have listed what is needed to qualify for it, especially about your financials.
We hope this read answered all your USDA loan questions and we wish you luck in applying for it!