USDA loans help rural homebuyers purchase a home with no money down. They are a great way to help potential homebuyers purchase a home much faster than they could with any other loan program that requires a down payment.
There’s one major difference with USDA loans that other government-backed loan programs don’t have though. The USDA has the final say in whether the loan gets approved or not. This means that even if the lender is willing to fund the loan, if the USDA doesn’t approve it, the lender cannot use the USDA program.
How many USDA loans don’t make it to the closing table?
It’s rare that the USDA doesn’t approve a loan that gets to them mostly because USDA lenders know what to look for in a loan applicant. It’s to the lender’s benefit to only send USDA loans to the USDA for approval that meet the guidelines. This is why it’s important to work with an experienced USDA lender that can tell which loans will get approved and which won’t get approved.
What the USDA Wants
Just what does the USDA want to approve your loan?
First, you have to prove that you are eligible for the loan. If you aren’t eligible, it’s a waste of your time as well as the lender’s to put you through the loan process. In order to be eligible for the loan, you must prove that your total household income is less than 115% of the median income for the area.
Your total household come includes income from all adults over the age of 18. The USDA includes the income of everyone, not just the borrower and co-borrower. They do this because they realize that multi-generational families help one another with the bills. Since the USDA loan is for those that cannot afford or qualify for any other program, the USDA has to limit who uses the program.
If you can prove that you are eligible for the program, you and any co-borrowers must meet the following requirements:
- Minimum 640 credit score
- Maximum 29% housing ratio
- Maximum 41% total debt ratio
- Stable income and employment
- Purchase of a rural home
- No defaulted federal loans in the past
- Proof that you don’t qualify for any other loan program, such as the FHA loan
The Role that Lenders Play
The USDA loan process can seem confusing. You apply for the loan with a lender and the lender underwrites your loan. But then the lender sends the loan file to the USDA for final approval. If the USDA approves it, the lender can set up the closing and fund your loan.
The USDA does play a vital role in the loan process because they have the final say in your approval, but they don’t underwrite or fund your loan. Instead, they guarantee it for the lender. This means that the USDA promises to pay the lender back should you default on your USDA loan. This is how USDA lenders are able to give you 100% financing without having strict requirements.
USDA loans do get denied, but only when lenders don’t follow the USDA guidelines. Make sure that you use a USDA lender that has experience with the loan program. As long as you meet the minimum requirements and the property passes the USDA appraisal, you should be in good shape to get the loan that you need.