USDA Home Loans provide a pathway toward homeownership for very low- to moderate-income earners with no down payment required, lower interest rates than the national average, and less expensive mortgage insurance. The approval process is divided into three steps: pre-qualification review, application submission, and eligibility verification.
What is a USDA Home Loan?
A USDA Home Loan is a mortgage backed by the U.S. Department of Agriculture. This loan aims to help potential homeowners realize the dream of home ownership while promoting economic growth and development in designated rural areas of the United States.
There are two types of USDA Home Loans for individuals and families interested in owning a single-family home:
- The Section 502 Guaranteed Loan Program assists individuals and families with moderate incomes who want to own a home.
- The Section 502 Direct Loan Program helps low-income and very low-income individuals and families interested in homeownership.
The significant difference between these two programs is that the Section 502 Direct Loan Program offers mortgages directly from the USDA rather than through a lender. The USDA subsidizes the loans of people who qualify for the Direct Loan Program. This helps ensure the family can meet repayment obligations. Those in the Guaranteed Loan Program do not have these same protections.
The Steps to Approval in the USDA Home Loans Buying Process
The first step to approval is finding the right lender. This can be done by reviewing your USDA-approved options via a local mortgage broker and navigating the qualifications and application accordingly, or by pursuing USDA-approved lenders directly.
Interested home buyers not utilizing broker services must look for a USDA-approved lender to work with, who is knowledgeable in USDA Home Loans and their steps to approval. Once the family or individual finds an appropriate lender, they’ll complete a pre-qualification review.
Lenders collect preliminary information related to finances, including monthly income, debts, and credit score. This data collection helps determine whether a potential homeowner is a good fit for a USDA Home Loan and, if so, how much buying power they qualify for. Lenders may offer interested individuals an estimate of their monthly payments. Lenders can also offer advice regarding ways to lower those payments.
Pre-qualification determines the program most appropriate for the interested person (the Direct Loan Program or the Guaranteed Loan Program) since income is the determining factor. It also helps potential homebuyers understand their creditworthiness.
The pre-qualification review process helps individuals learn how they can improve their credit score if they have derogatory marks on their credit — bad credit can increase the monthly mortgage payment.
Once the pre-qualification review is completed, interested individuals can submit a formal application for a USDA Home Loan.
Submitting an Application
A USDA Home Loan application includes submitting tax documents, pay stubs, and bank statements. Potential homebuyers also submit identification documents, such as a government-issued photo ID and Social Security Card/Number.
Any potential homebuyer interested in a USDA Home Loan is entitled to submit an official application regardless of eligibility determinations made during the pre-qualification review.
The application is an official account of finances, debt to income ratio, and verification of information provided during the pre-qualification review.
Lenders approved to originate USDA Home loans provide all the necessary forms to the potential homebuyer.
This is a similar process to conventional mortgage pre-approvals in which the individual must meet the Guaranteed Loan Program criteria. For people meeting the requirements for the Direct Loan Program, applications must be submitted directly to the USDA for review, and the process may be more rigorous.
Once a prospective homeowner has been pre-approved for a USDA Home Loan, the process of determining eligibility occurs. The prospective buyer is now pre-approved for a specific loan amount and can begin the house-hunting process.
Depending on where the parties wish to reside, their income must meet the eligibility requirements in that area. If their income surpasses the minimum standards, they would not be eligible for USDA Home Loans in that specific region.
In addition to income requirements, there are geographic requirements. Certain areas may appear rural; however, unless designated as being rural by the USDA, they would not be eligible for purchase using a USDA Home Loan.
Once a potential homeowner has found the property they would like to purchase, the USDA scrutinizes the income of the potential buyer, the geographic criteria of the house, and ensures that all the buyer and the home meet all program requirements. If the home falls within the rules of the program, the homeowner can use a USDA Home Loan to purchase the property.
The homeowner then works with their lender to determine mortgage insurance rates, closing fees, and monthly payments.
How to Get Started
Jumpstart the process by collecting preliminary financial documents that reflect one’s monthly income, assets, and liabilities. Start thinking about geographic regions where one wishes to reside to stave off surprise rejections during the eligibility phase.
Finding a trusted lender and feeling comfortable asking questions is essential. Prospective homebuyers can find approved USDA Home Loan lenders and perform the pre-qualification review to determine whether the Guaranteed Loan Program or the Direct Loan Program is appropriate.
It’s a good idea to be realistic about affordability when beginning the approval process. It’s not uncommon for homebuyers to experience “sticker shock” once mortgage insurance, closing costs, and interest rates are added to the monthly repayment obligations.
USDA Home Loans offer a pathway for interested homebuyers to obtain the dream of homeownership. Appropriate for very-low and low- to moderate-income earners.
The benefits of a USDA Home Loan include no down payment, mortgage insurance rates are cheaper, and interest rates are typically lower than the national average.
The drawbacks of a USDA Home Loan are that prospective homeowners are limited to certain geographic areas designated as rural by the USDA and strict adherence to income requirements.
The approval process comprises three steps: pre-qualification review, pre-approval application, and eligibility verification.
Working with a local mortgage broker and a trusted, approved lender well-versed in USDA Home Loans helps prospective homebuyers throughout the process and increases the likelihood of gaining approval and becoming eligible for this pathway to homeownership.