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09.15.2020 | Category: Homebuying

What Is A USDA Loan?

USDA loans are federally insured and can be compounded with USDA-sponsored grants which are backed by the U.S. Department of Agriculture. USDA loans are designed to provide homeownership opportunities to low- and moderate-income Americans living in rural areas. USDA loans offer the benefits of more flexible credit and lower income requirements coupled with a zero down payment option. Because the loan has less risk because it is secured by the USDA, these mortgage loans can typically offer competitive interest rates.

How does a USDA loan work?

Like the FHA, there is more than one type of USDA loan available for homeowners and prospective buyers. These loans types are USDA Guaranteed Loans, Section 502 Direct Loans, and Section 504 Loan. Under USDA Guaranteed Loans the USDA provides a 90% loan guarantee which allows lenders to absorb less risk and offer borrowers the opportunity to move forward with no down payment. The USDA Guaranteed Loan has flexible credit score requirements which often makes it an attractive loan program for borrowers with fair credit scores. Section 502 Direct Loans allow a borrower to not only buy a home but also to build, renovate, or relocate modestly sized properties in eligible rural areas. The Section 502 Direct Loan typically offers long term options and low interest rates. The income limits for the Section 502 Direct Loan are slightly lower compared to the income requirements for the USDA Guaranteed Loan. The Section 504 Loan is also known as a USDA Housing Repair loan or grants. This loan is not used to buy a property, but instead allows very low income homeowners to repair or modernize eligible rural properties.

How To Qualify For A USDA Loan?

To be eligible to apply for a USDA loan, a borrower must be a U.S. citizen or permanent resident, with a source of reliable income for at least 24 months and have an established credit history. Although credit requirements for USDA loan are lower than most conventional loans and there is no minimum required credit score, having a credit score above 640 may allow a borrower to experience streamlined loan processing. A borrower’s repayment pattern history will also be considered as part of the application review. To qualify for a USDA loan, having little to no history of late payments or liens is preferred by many lenders.

What Are USDA Loan Requirements?

To apply for a USDA loan a borrower is required to have a debt-to-income ratio of 41%. If a borrower has a credit score above 680, the lender could consider allowing for a higher debt ratio. A borrower must meet the income limits to satisfy USDA loan requirements. These income limits vary from state to state and may also differ from region to region in each US county. Income requirements also differ based on the total number of people in the household and the number of children under 18 in the household. The income of every adult earner in the household will be considered when quantifying the total income. The total household income will need to be less than 115% of the area median income. The property on the loan must be the borrower’s primary residence and located in a qualified rural area. The USDA defines a rural area as open country, which is not part of an urban area typically with a population of 35,000 or less. Because of this definition, there are some suburbs that also qualify as a USDA eligible property. Maximum loan limits will vary based on the type of USDA loan program or grant you choose. Typically, a borrower’s loan limit is determined based on the evaluation of their income and debt which confirms a borrower’s repayment abilities.  

How Can I Apply For A USDA Loan?

To prepare to apply for a USDA loan, you should collect the following documents which will be reviewed by a licensed loan officer or originator.

  • Copy of a government-issued ID (such as a U.S. passport or driver’s license)
  • Most recent two years of W-2 statements to establish income
  • Most recent two years of tax returns for self-employment income
  • Recent pay stubs and bank statements from the last six months

How long does USDA loan application take to process?

All loan processes are different based on a variety of eligibility qualifications, however, most prospective homebuyers can expect the full process of an USDA loan to take between 30 – 60 days from application to closing. The pre-approval process for a USDA long can be as short as three days or take up to one week. The remaining time in the process is comprised of the required processes such as the home appraisal, other lender checks, and underwriting.

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