Pursuing the USDA Home Loan
The United States Department of Agriculture (USDA) provides home loans for home buyers in rural and suburban regions where they guarantee up to 100% financing. USDA loans have become a favorite form of financing for low to moderate income group due to relaxed credit standards and the 100% financing program that does not ask for any down payment.
If you're looking to buy a home in an eligible rural or suburban area, here is everything you need to know about getting a USDA home loan:If you're looking to buy a home in an eligible rural or suburban area, here is everything you need to know about getting a USDA home loan:
USDA Loan Eligibility Criteria
To qualify for the USDA home loan program, you must meet certain eligibility criteria related to your income, home location, and credit history:To qualify for the USDA home loan program, you must meet certain eligibility criteria related to your income, home location, and credit history:
Income Limits: One thing to note is that there is no specific income limits set by the USDA, but one must prove he or she is able to pay back the loan. Usually, the monthly income should not be more than 115% of the median income for the specified region.
Home Location: The home you want to purchase should be in USDA’s rural or suburban area of operation approved for financing. The property can be an existing house, condominium or townhouse, or simply a piece of land to be developed.
Credit History: It is not necessary to have impeccable credit with USDA but you have to prove that you can afford the loan. Approximately 30% of lenders allow applicants with scores below 640. However, some other lenders may consider approving credit scores of about 600 but with some strengths that counterbalance the low rating.
Other parameters such as the existing liabilities, job profile, etc. may also be taken into consideration by the lender while approving USDA home loan.
Finding a USDA-Approved Lender
The USDA does not provide home loans; however, it provides home loan guarantees to private lenders to encourage them to lend to rural residents with a low income. It determines loan agreements offered by the third-party lenders that have been accredited and approved. This helps in reducing the risk for the lenders while at the same time extending the benefits to the buyers.
The list of USDA approved lenders can be found in the USDA eligibility website. Some of the national lenders which offer USDA products include Fairway Independent Mortgage Company and Freedom Mortgage among others. Community banks and credit unions can also participate in this scheme provided they meet the set standards and requirements.
Applying for USDA loans with multiple lenders allows you to compare the rates and conditions offered. Make sure that you you get rate quotes and also origination fees and other closing costs charged by the respective lenders.
Gathering Documentation
Your lender will ask for many documents to verify your eligibility and assess your financial credentials before approving a USDA home loan:Your lender will ask for many documents to verify your eligibility and assess your financial credentials before approving a USDA home loan:
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Latest bank statements for the last 30 days to prove steady income as reflected by the pay stubs. Other income such as bonus, commission, etc. has to be accounted for as well.
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Income tax returns for the previous two years, copy of passport, social security numbers, and W-2s for the last two years. Independent customers, however, will require tax returns.
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Bank and brokerage statements to prove your assets, reserves and daily expenses.
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Credit check will be run from one of the three credit reporting agencies. If there are any errors, they should be corrected before moving forward.
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From your pay stub, tax returns and the debts reported by the credit bureau, your debt to income ratios will be determined.
- Sometimes, there may be a need to present other papers such as divorce decrees, the notice of dismissal of bankruptcy, proof of inheritance, etc. Provide all the documents requested and do so truthfully.
Finding an Eligible Property
The property you wish to buy must meet all eligibility criteria for a USDA-backed loan:
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It has to be situated in a rural or suburban area that meets the requirements of the USDA. Eligible areas can be identified by visiting the USDA property eligibility site.
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These homes can be single, one, two, three, or more unit homes, condos, town homes, manufactured or mobile homes to be bought.
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Land to construct a new home also qualifies if the land is empty and zoned for residential use.
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If you are planning to use the property for business purposes, it is essential to note that duplexes and other buildings containing two to four units are acceptable as long as you live in one of the units.
- It should be affordable for the area and not go beyond the purchasing power limits set in the county. It is recommended that you consult with your lender to find out on the caps before you make an offer.
It is helpful to have an agent to help in the buying process, especially when looking for homes that meet the USDA requirements and are within your desired price point.
The Loan Application Process
Once you find an eligible property within your budget, complete a USDA loan application with all documents:Once you find an eligible property within your budget, complete a USDA loan application with all documents:
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The lender will run your credit and also scrutinize all the financial/employment documents you provided. Any discrepancy or inconsistencies may lead to delay in approval.
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You should be prepared to have your debt to income ratios, assets, reserves, and other requirements scrutinized before getting cleared.
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You will have to provide an affidavit stating that the home will be your primary residence when purchasing it. Houses that are not owned for permanent living or residential purposes such as second homes or investment properties does not meet the requirements.
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It is crucial to talk about other costs such as origination fees, appraisal costs, and other closing costs. Many such costs, USDA permits the financing of.
This means that, it would take between 30 to 60 days for a USDA loan to be closed from the time of application. Complicated applications may be longer to process while pre-approvals may take a shorter time after identifying the right property.
During the application, you will also have to pay an initial token good-faith deposit or earnest money to show willingness and capability to buy the property once approved. Shop around for rates and then promptly apply it after acceptance or you could close quickly once your offer is accepted
