If your search for a home lands you in the market for a government-backed loan, you have to look for a specific lender. You cannot just walk into any bank and assume they can give you a USDA, FHA, or VA loan. Instead, you need a lender that has already received the approval to provide each specific loan type. USDA loans are less common than other government-backed loans, so finding approved lenders for this loan type may take a little more legwork.
The USDA Does Not Fund the Loans
First, you must realize, the USDA does not fund USDA loans. Despite their name, the USDA only guarantees them. This means they promise to pay the lender a portion of the loan back if you default on it. In exchange for this guarantee, though, the lender promises to meet the USDA guidelines. The USDA does have final say in any loan that gets funded in their name, so there really is no worry that the loan should not have been approved. Because of this, though, you have to find a lender that will take your loan file. Any lender has the right to turn you down even if you meet the USDA guidelines. These are called lender overlays and they are the lender’s rights because they fund the loans.
Finding Approved Lenders
You might not see lenders advertising the fact that they offer USDA loans. You can start with the USDA’s list of approved lenders. This gives you some names of banks in your area that you can call. You can also ask around. Bank personnel talk and each often knows what the other offers. If you contact a bank that does not offer the USDA loan, they may know of one that does. Just keep asking until you find a few lenders that you can apply with for your USDA loan.
Know Your Loan Type
Before you start looking for USDA lenders, though, you should know the type of loan you want. The USDA has two main loans:
- Direct – These are loans for the very low-income borrowers. You can purchase, build, or renovate a rural property with this loan. However, to qualify for the direct loan, you must make less than 50 percent of the average median income for your area. You also must not have any other housing and be unable to obtain a loan from anywhere else. The funds from this loan come directly from the USDA.
- Guaranteed – These are the more common USDA loans. This is the loan you obtain from a private lender. The USDA then guarantees the loan. You cannot make more than 115% of the average median income for your area for this loan. Like the direct loan, you cannot have any other housing or be able to obtain financing from somewhere else.
Once you know the type of USDA loan you qualify for, you can look for the right lender. If you fall within the Direct category, you can go directly to the USDA for your loan.
Keep in mind, there are other requirements you must meet with USDA loans. For instance, the property’s location matters. You can use the USDA’s map to see which properties qualify. The area must be rural and the home must be modest. Rural might mean something different to you than it does the USDA, though. Take a quick look at the map and input a specific address or search by area to get familiar with the USDA rural areas you can utilize. This gives you a better idea of the pool of homes available to you if you want to use the USDA loan.
As discussed above, you also must not make too much money to qualify for this program. The USDA started it to help those in need. Because of this, the USDA compiles your total household income to see if you are eligible for the program. Unfortunately, you cannot use your total household income to qualify for the loan, though. It is just to see if your household makes too much money for the program. The USDA must limit who qualifies for the program in order to keep their reserves funded. Because they guarantee the loan, they need enough money in their reserves to stand by their promise.
The USDA lender will take the income of every household member and total it. They will then subtract any allowances you may receive. For example, the USDA gives allowances for children either under the age of 18 or over 18 and a full-time student; disabled household members; and elderly household members over the age of 62. Each person within these categories with the exception of the elderly provides you with a $480 allowance. An elderly household member provides you with a $400 credit. The total allowances come directly off your total household income. You can then compare that number to the USDA’s income guidelines to see if you meet the requirements for your area.
Just as is the case with any other loan type, you should shop around for approved USDA lenders. You never know what each lender has to offer you. Some can take on more risk than others. The lenders who cannot handle risk will add their own overlays on the loan’s guidelines. This can make it trickier to get approved. Shopping around also provides you with more insight as to the typical interest rates and fees lenders charge. Some charge points while others do not. The same is true for other closing fees. Some lenders have higher fees than others. Shopping around will help you secure the best deal.
Finding approved lenders for a USDA loan is not as intimidating as it sounds. There are lenders out there; you just have to find them. Once you start the process, you will see that it is much easier than it seems. Make sure you ask the right questions and do your homework before you shop for lenders. This way you fully understand the USDA loan and all it has to offer.