Loan applications get turned down every day, but USDA loans have a unique aspect about them. If you think you may be eligible for this program, keep reading to learn the most common reasons USDA lenders turn loan applications down.
What is the USDA Loan?
First, let’s look at how the USDA loan works, as it’s a unique program compared to any others available today.
USDA loans provide 100% financing for borrowers that make less than 115% of the average income for the area. In addition, these borrowers must purchase a home (that they will live in) within the USDA boundaries. The USDA calls this the ‘rural boundaries;’ however, their definition of rural and most others are a little different. This is a good thing though, because the USDA has large areas they consider rural that are right outside the city lines.
If you are eligible for the USDA loan, you can secure 100% financing with low closing costs and a low interest rate. Sounds perfect, right? It does, until you receive the phone call saying your application was denied.
Let’s look at why USDA lenders turn these applications down.
Your Income is Too High
This sounds counterintuitive, doesn’t it? You can make too much money and not qualify for the USDA loan. There’s a reason though. The program was designed for low-income borrowers that otherwise could not secure financing with any other program. In other words, borrowers that make too much money should be able to get a loan from another program.
Keep in mind, the USDA calculates the income of all household members in order to determine your eligibility. This means if grandma and grandpa live with you and they have an income, it counts towards your household eligibility. However, you get certain allowances. If you have children you can deduct $480 per child from your monthly income. If you have any disabled relatives living with you, that’s another $480 deduction. Lastly, you can deduct $400 for any elderly people residing with you.
Luckily, you can tell if you are eligible for the program or not on the USDA’s website. If you fall outside their parameters, save yourself the hassle and look for a different program.
You Have Too Much Debt
This is an issue for all loan types, not just USDA loans. If you have too much debt, the USDA will not give you a loan. The USDA has flexible guidelines, though. They allow a 29% front-end debt ratio. If your proposed mortgage payment is no more than 29% of your gross monthly income, you pass the test.
They also allow up to a 41% back-end debt ratio. This means all of your debt combined cannot take up more than 41% of your gross monthly income. This includes minimum credit card payments, auto loans, personal loans, and student loans in combination with your proposed mortgage payment.
However, your gross monthly income used for qualification purposes is only that of the primary borrower and co-borrower. The total household income is only used for eligibility, not for qualification purposes.
If your debt ratio is too high based on your qualifying income, your loan application could be denied.
The Home’s Value is too Low
The appraisal is a thorn in the side for many borrowers. The USDA provides 100% financing, so they have to be very careful regarding the values. If you sign a purchase contract on a home for $250,000, for example, but the appraiser says it’s worth $225,000, it can kill your deal. The USDA will not guarantee a loan on a home that they are upside down on.
You do have the option to come up with the difference between the appraised value and purchase price, but it defeats the purpose of the USDA loan. Besides, this program is for low-income borrowers. If you have enough money to put down on a home, chances are that you would qualify for a different program altogether.
Eligible for Another Program
This last issue isn’t something many people think about. But, if you are eligible for say an FHA loan, you cannot get a USDA loan. This could result in a denial. The USDA program is self-funded by the USDA. They restrict the program to only those that would otherwise be unable to purchase a home.
USDA lenders will be able to tell if you meet the parameters of any other loan program. For example, if you have a 620 credit score and 28/36 debt ratios, the lender will likely size you up for an FHA loan rather than the USDA loan. This helps minimize wasted time and scrambling to find financing after finding out you are not eligible for the USDA loan.
There are many USDA lenders out there, but make sure you shop around. If you choose a lender that isn’t experienced in the program, you could find yourself without the loan you need. Choose an experienced lender that offers a good interest rate and term. Then you minimize the risk of losing your approval because the lender will know exactly what to look for before approving or denying your application.