How to Get Approved for a USDA Loan
Published on July 25, 2024 | 7 Minute read
Melanie
Ortiz Reyes
Content Specialist
If you're looking to buy a home in a rural or suburban area, a USDA loan could be a perfect fit for you. USDA loans are backed by the United States Department of Agriculture and offer benefits such as no down payment, competitive interest rates, and lower mortgage insurance costs. However, getting approved for a USDA loan involves meeting specific eligibility requirements and navigating the application process.
Understanding USDA Loans
USDA loans are part of the USDA Rural Development Guaranteed Housing Loan Program, designed to assist low to moderate-income households in obtaining homeownership. There are two main types of USDA loans:
1. USDA Guaranteed Loans: Issued by participating lenders and guaranteed by the USDA. These loans are for homebuyers with incomes up to 115% of the median income for the area.
2. USDA Direct Loans: Issued directly by the USDA. These loans are for very low-income applicants, with income limits typically set at 50-80% of the median income for the area.
For the purpose of this guide, we'll focus on the more common USDA Guaranteed Loans.
Step 1: Determine Eligibility
Before applying for a USDA loan, you need to determine if you and the property you wish to buy are eligible.
Income Requirements
USDA loans are intended for low to moderate-income borrowers. The exact income limits vary by location and household size, but generally, your household income must not exceed 115% of the median income for your area. You can check the income limits for your area on the USDA's website.
Property Requirements
USDA loans are designed for properties in eligible rural and suburban areas. The USDA defines rural areas as those with a population of 35,000 or less. You can use the USDA's property eligibility map to see if a specific property qualifies.
Credit Score Requirements
While the USDA does not set a minimum credit score requirement, most lenders prefer a score of at least 640. This score makes you eligible for streamlined processing, which can simplify the approval process.
Other Requirements
- Citizenship: You must be a U.S. citizen, a non-citizen national, or a qualified alien.
- Primary Residence: The property must be used as your primary residence.
- Debt-to-Income Ratio (DTI): Your DTI ratio should not exceed 41%, though higher ratios may be accepted with compensating factors.
Step 2: Gather Necessary Documentation
Once you determine your eligibility, the next step is to gather the necessary documentation. This will streamline the application process and ensure you have everything you need for a lender to review your application.
Income Documentation
- Recent pay stubs
- W-2 forms from the past two years
- Federal tax returns from the past two years
- Proof of additional income (like alimony, child support)
Credit Documentation
- Credit report
- Documentation for any derogatory items (bankruptcy, foreclosure)
Property Documentation
- Purchase agreement
- Proof of property eligibility (address verification)
Step 3: Find a USDA-Approved Lender
Not all lenders offer USDA loans, so it's important to find one that does. USDA-approved lenders are familiar with the specific requirements of these loans and can guide you through the application process. You can find a list of approved lenders on the USDA's website.
Step 4: Pre-Qualification and Pre-Approval
Before you start house hunting, it's a good idea to get pre-qualified and pre-approved for a USDA loan. These steps can give you a better understanding of how much you can afford and make you a more attractive buyer to sellers.
Pre-Qualification
Pre-qualification is an informal process where you provide basic financial information to a lender. The lender will give you an estimate of how much you might be able to borrow. This step is useful for setting a budget and narrowing down your home search.
Pre-Approval
Pre-approval is a more formal process where the lender verifies your financial information and runs a credit check. If you’re pre-approved, you’ll receive a pre-approval letter stating the amount you’re approved to borrow. This letter can be presented to sellers as proof of your financial readiness to buy a home.
Step 5: Find a Property
With your pre-approval in hand, you can start looking for a property that meets USDA eligibility requirements. Work with a real estate agent who is experienced with USDA loans and understands the nuances of finding eligible properties.
Step 6: Submit Your Application
Once you find a property and have an accepted offer, you can submit your formal application for a USDA loan. This process involves providing detailed information about your income, assets, and debts, as well as documentation related to the property.
Application Steps
1. Complete the Loan Application: Your lender will provide you with a USDA loan application form. Complete this form accurately and thoroughly.
2. Provide Required Documentation: Submit all the necessary documentation you gathered in Step 2.
3. Home Appraisal: The lender will order a home appraisal to ensure the property meets USDA standards and is worth the purchase price.
4. Underwriting: The lender’s underwriting team will review your application and documentation to ensure you meet all USDA loan requirements.
5. Loan Approval: If your application is approved, the lender will issue a commitment letter outlining the terms of the loan.
Step 7: Close on Your Loan
After your loan is approved, the final step is closing. At closing, you’ll sign all the necessary paperwork, pay any closing costs, and finalize the loan. Once this process is complete, you’ll receive the keys to your new home.
Closing Costs
USDA loans typically have lower closing costs compared to other types of loans. These costs can include:
- Origination fees
- Appraisal fees
- Title insurance
- Property taxes
- Homeowner’s insurance
Tips for a Smooth USDA Loan Approval
1. Maintain Good Credit: Pay your bills on time, reduce your debt, and avoid applying for new credit before and during the loan process.
2. Save for Closing Costs: While USDA loans require no down payment, you’ll still need funds for closing costs. Start saving early to ensure you have enough.
3. Choose a Knowledgeable Real Estate Agent: An agent experienced with USDA loans can help you find eligible properties and navigate the process smoothly.
4. Stay Organized: Keep all your financial documents organized and readily accessible. This will make the application process more efficient.
5. Communicate with Your Lender: Maintain open communication with your lender and respond promptly to any requests for information or documentation.
Getting approved for a USDA loan can open the door to homeownership for many buyers who might not qualify for other loan programs. By understanding the eligibility requirements, gathering the necessary documentation, and working with a USDA-approved lender, you can navigate the process successfully.
USDA loans offer a pathway to homeownership with no down payment and favorable terms, making them an excellent option for eligible buyers. Remember, the key steps include determining your eligibility, finding a USDA-approved lender, getting pre-approved, and submitting a thorough application. With careful planning and preparation, you can take advantage of the benefits of a USDA loan.