The United States Department of Agriculture (USDA) provides 100% Home Loans to any buyer of homes located in rural and suburban environments. USDA home loans or the Section 502 direct loans come with no down payment and relatively favorable interest rates. Moreover, USDA loans involve higher limits on credit score and DTI than the generally used mortgage credit. If you are planning to purchase a home in an eligible rural area, which also falls within the specified income requirements, then the USDA loan may be a good fit. This article will demystify the process of applying for and obtaining financing through USDA home loan program by following these simple steps.
Determining Your Eligibility Before you apply for a USDA home loan, understand whether or not you qualify for the loan as stipulated by the USDA. The property you intending to acquire must be situated in a qualified rural area according to the standards of the USDA Rural Development. Further, the candidate must be a United States citizen or have the legal permission to work in the United States of America. A home to be used must be the primary residence, which means it should not be a second house or a house for rent. Last, applicants need to provide proof of income that does not exceed 80% of the area median income for the place where the home is situated. It is worth getting through the requirements of eligibility before applying in order to avoid doing numerous documentations.
However, it is a real challenge to search for a USDA approved lender. The USDA home loans function like most other conventional mortgages – you must apply through an institution that has been approved by the USDA. To begin with, it is imperative to identify lenders within the given local market, who can provide USDA funding. Check the USDA Lender List to find lenders in your area who are engaged in the rural housing loan program. Prepare a list of offers from different lenders and compare the interest rates and the fees of each offer to identify the best one. It is important to understand that while the USDA will guarantee these loans the pricing is ultimately set by the lender. After choosing a lending institution, contact your loan officer and make an appointment to fill out the application.
Collect the Necessary Documentation When you have identified a lender, gather all the paperwork that you need to complete to demonstrate your qualification for the mortgage loan. Typical documents needed when applying for a USDA home loan include:Typical documents needed when applying for a USDA home loan include:
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This is the loan application form which contains data about income, employment, assets, debts, and household size.
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Tax forms such as W-2s and pay stubs of the last two years.
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Tax returns for the two preceding years at the federal level
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Bank statements of the last two months.
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The reporting of any extra income such as pensions or Social Security payments.
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Employer information about all the employers that have been approached over the last two years
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Photo ID for each applicant
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Each household member is to provide their Social Security numbers.
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If the claimant and counterclaimant were married at the time of the proceedings, the divorce decree or separation agreements, if any.
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They also include a list of all the property owned
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Gift letter from donor if receiving gift funds for down payment
When you meet your loan officer, it is very useful to have these documents at hand so that the application’s processing is smooth
Finalize all necessary documents relating to the loan such as loan application form and the loan agreement. When meeting the lender you will be required to complete all necessary loan documents such as the form 1003 uniform residential loan application. This involves submitting permission to the lender to obtain your credit report as well as giving details about your financial status, credit history, and any other evidence that you meet the qualifying requirements. It is important to fill all the questions rightly and completely in the forms so that in future there will be no problems or the loan will be rejected. If you experience any problems trying to understand any part of the paperwork, do not hesitate to consult your loan officer. It may sound obvious but be careful not to sign anything without properly reading through it since signing documents signifies the beginning of the underwriting process.
Get pre qualified for a mortgage Along with the submission of the first application documents, most loan officers send pre-approval letters to indicate the maximum amount of funding that can be provided to a client depending on his or her revenues, other assets, obligations, and credit histories. Prequalification letters serve to inform the sellers that you are capable of securing financing for the total purchase price. This puts your offer above other buyers who are still in the process of looking for loans to finance them. In the prequalification stage, the lenders also pull your credit report and your score to confirm that you meet the minimum FICO score for USDA home loan. Once the bank analyses your information, they provide you with pre-qualification letter with the possible maximum loan amount, estimated interest rate, monthly payment, cash to close.
Provide Time for Credit Analysis and Processing When you formally apply for a USDA loan and allow the lender to pull your credit history, the rigorous credit check process begins. They attest to all forms of documents and information submitted at the time of applying to ensure that all eligibility criteria are met. Income is verified through tax returns and employment information gets verified. This also involves debts, assets, and credit history in addition to the underwriters’ assessment of your loan request. This is where your application gets denied if any aspect of your finances does not meet USDA criteria. If you think the underwriters made a poor assessment of your circumstances, then you can appeal the decision. In underwriting if things go well, you get approval for a loan provided you can find a qualifying property.
Propose a Purchase Price for an Eligible Property With prequalification and preapproval letters in hand, start seriously looking at homes in USDA eligible areas that are in your price range. When you identify the right house, negotiate with the owner of the house and try to buy it. The documents required for preapproval should be presented together with the purchase contract to enhance the offer and increase the likelihood of acceptance. Just always ensure that the property is within compliance with the USDA location and quality standards to verify the rural status and property standards before listing. Another factor is that the USDA is quite flexible on the type of housing finance it provides – the guarantee for existing units and mortgages for new construction.
Request an Appraisal on the Selected Property Once you have received an accepted offer on a given house, one should contact the lender to arrange for the full appraisal of the property in question. Licensed appraisers go to the place to physically assess the value of the home against the other similar homes that have been sold recently in the market. In the same respect the appraiser confirms that the property in question has complied fully with all quality requirements set by the Rural Housing Service section of the USDA. Roofing systems, floor, walls, structure, electrical connections, plumbing, heating and the overall comfort of the premises are all documented during inspection. USDA home loans mandate properties to have appraisal values of not less than the negotiated contract purchase price. If, for example, the appraisal reveals critical issues that reduce the price of the house below the quoted price, be prepared to reschedule with the seller for new terms before the closing.
Information on USDA Mortgage Close on Your USDA Mortgage At the end of the process, everyone inks the documents and you are handed the house keys to your new home that has been financed through a USDA mortgage. Provide a cashier’s check for the estimated closing costs that were estimated while undergoing preapproval. Such expenses include appraisal expenses, origination fees, insurance costs, property taxes, and other prepaid expenses and escrow payments are made at this time. You also provide for future tax and insurance payments which are paid into the escrow account every time you make your monthly mortgage payments. Complete a final walkthrough inspection immediately prior to closing to ensure all appliances and systems are working correctly after appraisal repairs have been made according to the terms of the purchase contract. Once you have done this, congratulations, you are now an official USDA home loan borrower and you can finance your rural property with zero down payment.
It may take some time and effort to be approved for a USDA home loan, but it makes it possible for people to own a home they have always wanted at a relatively low cost. Hopefully this overview helps you feel ready and willing to go take the next steps and apply for a mortgage to purchase a home in a rural area soon!
