The USDA loan application process is similar to any other loan process to start, but the USDA has final approval, which is different than any other loan program, including VA and FHA programs. If you know that the home you wish to purchase or refinance falls within the USDA boundaries, you can apply for the loan with a USDA approved lender and go from there. You must find a lender that has USDA approval; however, not every lender has that, which means they are not authorized to provide this type of loan.
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Completing the USDA Loan Application
Completing the USDA loan application is the same as any other loan – you must disclose all of your personal information in order for the lender to determine if you would be eligible for the program. Lenders approved by the USDA have a good understanding of what will get approved and what will not. For example, loans with credit scores lower than 580 are automatically ineligible. USDA lenders know that so they would help steer you to another loan program, or even a subprime loan that would help you get financed as the USDA program would not be an option.
USDA lenders also know the other parameters that must be in order so that you can get this type of loan. For example, your debt ratios must be within the 29/41 guidelines. If they are higher, you must be eligible for a debt ratio waiver, which is only allowed for borrowers that have exceptional compensating factors, such as a high credit score, plenty of reserves, or extreme job stability. These borrowers may be able to apply for a debt ratio waiver, which is the USDA’s way of allowing higher ratios.
Analyzing the Application
Your lender will analyze your USDA loan application for other discrepancies that may render you ineligible for the program. Of utmost concern is your credit report. The score itself is pretty straightforward – you must have a score no lower than 580 in order to qualify. In addition, however, you have to meet certain payment requirements.
- If your credit score is lower than 620, you will need to make sure that you have no late housing payments in the last 12 months as well as no more than 2 late housing payments in the last 3 years. This is because your credit score is on the lower end, so it is considered a riskier loan than if it were above 620.
- If your credit score is higher than 620, your housing payments still matter; however, the lender has to look at the last 3 years only. You cannot have more than 2 late housing payments in that time, but if one happens to fall within the last 12 months, you would still be eligible for the loan.
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Your lender will also determine your adjusted income for the program. This income differs from your eligibility income, which they use to determine your qualifying ratios (debt ratios). Your adjusted income is what they use to determine if your income is low enough for USDA assistance. If you make more than 115 percent of the median income for your area (every area differs) then you are ineligible. You can find the income matrix on the USDA website detailed by county so that you can determine how much household income you can have and still be eligible.
Your adjusted income gets calculated by your lender with the following deductions:
- $480 for every child that lives with you as long as they are under the age of 18
- $480 for every child over the age of 18 that lives with you and is a full-time student
- $480 for every disabled person that lives with you
- $400 for every elderly person that lives with you
After these allowances get deducted, you have your adjusted income which gets compared to the median income for your area. If you are over the maximum amount, you will not be eligible because this loan program was set up to help those that would otherwise be ineligible to purchase safe and sanitary housing for themselves and their family.
Your lender will take a close look at your loan file to determine if it will get USDA approval. USDA approved lenders have a good handle on what the USDA requires. This means they will not send your loan application through to them and make you wait weeks for an answer knowing that you will receive a denial. They look closely at your credit score, credit history, property location, and debt to income ratios. They know what the USDA allows and does not allow, which means they only send the applications through that they think will get approved.
Once the lender determines that you are eligible for the loan program, the file gets sent to the USDA. This process can take a while – sometimes several weeks. The final approval from the USDA is necessary to fund the loan or they will not guarantee it for the lender.
USDA Loan Application Status
When you apply for a USDA loan, you apply through a lender, but they are not the only entity that has final say on whether or not you qualify for the loan. You must obtain approval from the USDA as well. This process takes approximately 2 steps to complete.
Going to the USDA
The process with the lender will be much shorter than that with the USDA. The lender can process the loan in a matter of days, while your loan file may sit with the USDA for a few weeks. It depends on the number of applications sent to them at any given time. Your lender or even you can check the status of your loan with the USDA by visiting https://usdalinc.sc.egov.usda.gov/. This website will give you the status of your loan with the USDA so you can know what to expect.
Overall, knowing that your credit score must be higher than 580, your debt ratios within 29 percent up front and 41 percent in the back and the fact that you cannot have more than 2 late housing payments in the last 3 years or any late housing payments in the last 12 months if you have a score lower than 620 will help you determine on your own whether or not your USDA loan status will eventually be approved.
As long as you find the right lender and have open lines of communication throughout the entire process, you will know where your application stands at all times and eventually you will have USDA financing that helps you get into a home that you might otherwise be unable to purchase. Overall, the USDA loan application is very easy to complete and navigate.