The USDA Direct Loan helps very low-income families secure housing. An eligible borrower can purchase a home in a rural area with this program. The program assists these low-income families by providing payment assistance. Typically, this means lower payments for a specific period to help borrowers afford the new mortgage payment. Every family receives a different amount of assistance with this program. Because of its unique properties, the underwriting process works a little differently.
General Income Guidelines
Before you apply for the USDA Direct Loan, you should determine if your income meets the required guidelines. In this case, you can make too much money and not qualify. Your adjusted income must be at the low-income limit for your area. You can find out how much the low-income limit is for your area, by consulting the USDA income map.
Securing a Preapproval
The first step in the USDA Direct Loan Underwriting is to secure a preapproval. You can do this part of the process over the phone. It takes less than an hour. You must answer simple questions regarding your income, employment, living arrangements, and assets. The underwriter takes this information and runs it through the USDA’s automated system. This system will pull your credit and look at all of the factors on your application to come up with an answer. Typically, you can have a preapproval within the same day you apply for it.
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Finding a Home
Once you secure your preapproval, you are free to shop for a home within the USDA boundaries. This is the part that delays the USDA underwriting the most. You cannot go through the rest of the underwriting process without a property in mind. The actual property plays an important role in whether you secure an approval or not. For example, if the home is not within the USDA boundaries, you would not be able to secure financing. Another example is if the home is not safe and sanitary, meaning it does not pass the USDA appraisal. You would not be able to secure USDA financing in this case either.
Providing the Conditions to the Underwriter
Once you find a home, it is time to supply the lender with all of your documents. You will need to prove the following things to the lender before you begin:
- You cannot have any other type of safe and sanitary housing
- You cannot be eligible for any other loan program
- You must live in the property
- You must be legally capable of having a loan
- You cannot have any prior defaults on government programs
Underwriters also need to determine that the property you purchase meets the Section 502 guidelines. These include:
- The house must be modest in size; usually less than 2,000 square feet
- Not have a value that exceeds the average value for the area
- No in-ground swimming pool on the property
- Not used for commercial purposes
Once you get through this step, the underwriter will evaluate your paystubs, W-2s, tax returns, and asset statements to see if you meet the USDA underwriting guidelines. The underwriter must also wait for the appraiser to complete the appraisal and the title company to complete a title search. These all delay the time it takes to complete the USDA Direct Loan underwriting.
The USDA Office
Once the underwriter completes his portion of the loan approval, he sends it to the USDA office. Only complete packages can be sent to the office. This is where the loan receives the final approval. Without the approval of the USDA, the lender cannot fund the loan. This process can take up to 3 weeks to complete. The USDA office determines if the underwriter fully evaluated every aspect of the loan and that the property does meet the USDA guidelines.
Closing the Loan
The final step is to close the loan at the title company. The lender, your attorney, and the title company will be present to complete the process. Once the lender receives the final commitment from the USDA, you can usually get to the closing table within a few days. The title company just needs the time to prepare the closing documents to close the loan. In addition, the bank needs the time to secure the funds.
Things to Keep in Mind with USDA Direct Loan Underwriting
In order to speed the underwriting process up when dealing with a USDA Direct Loan is to do all of the following:
- Make sure you work with an approved lender. Not all lenders have the ability to secure USDA financing. Inquire with specific lenders before you apply. You should also ask them about their experience with USDA loans. You want to work with an experienced lender to ensure the process goes smoothly.
- Ask your lender to check with the USDA to see the current turnaround times. There are certain times of year that the USDA is busier due to an influx of files. Try to work your file around those busy times in order to speed up the underwriting process.
- Make sure you stay in close contact with your lender so you always know when they need additional documentation. The longer you take to provide the lender with what he needs, the longer the process takes.
USDA Direct Loan underwriting does not always take an excessive amount of time. There are a lot of factors that play into the process. Understanding what you are getting into and asking the right questions can help you speed the process along. Make sure you use an experienced lender so that the process does go off without a hitch. If you have a lot of back and forth between the lender and the USDA because a full file was not sent or the file was underwritten incorrectly, it could really delay the process. In the end, a USDA loan does not take that much longer to underwrite than any other loan; you just have to know how to go about it.
