If you want to buy a home with a USDA mortgage, it’s best to get pre-approved before you start job hunting. This way you can tell how much home you can afford and if you even qualify for USDA financing.
USDA financing works a little differently than other financing programs. It’s possible that you make too much money for the program. The USDA began the program to help low to middle-income families that wouldn’t qualify for any other type of mortgage. Getting pre-approved will let you know that you are eligible for the program and that you qualify for it.
Proving Your Eligibility
The first step in the USDA pre-approval is to ensure that you are eligible for the program. You should know that the USDA requires lenders to look at your total household income for this step, not just the income of the borrower and co-borrower. The USDA recognizes that multi-generational families often live together and each party helps out with the bills.
In order to prove your eligibility, you’ll need to provide proof of income of all family members. This includes teenagers that work as well as elderly people that receive a fixed income, such as social security. You can determine ahead of time if you are eligible for the loan, by using the USDA’s income eligibility tool.
Getting Pre-Approved for the USDA Loan
When you are ready to get pre-approved, you’ll need to make sure you’ve completed a USDA loan application. This is the same loan application you would complete for any loan. On this application, you will disclose your personal identifying information, income, assets, and debts. You’ll provide information on your monthly income as well as your employment.
The lender will run this information through their system to make sure that you qualify for the program. Once they determine that you are a good candidate, they will ask you to provide proof of the information you provided. This means you must provide:
- Proof of your income – Paystubs, W-2s, and/or tax returns with all schedules
- Proof of your assets – At least the last two months’ of your bank statements
- Proof of any miscellaneous income – Award letters for social security or disability income
The lender will then use this information to decide if you qualify for a USDA loan. Understanding the USDA loan requirements can help you determine if you’d be a good candidate. The USDA requires:
- 640 minimum credit score
- Maximum 29% housing ratio
- Maximum 41% total debt ratio
- Stable income
- Stable employment
- Proof that your income will continue for the foreseeable future
Once the underwriter has all of the information, they can decide if you qualify. If you do, they will issue a pre-approval letter. This letter will show sellers how much loan you qualify to receive, the name of the loan program, and the conditions that you must satisfy in order to close on the loan.
Because the USDA loan doesn’t require a down payment, the amount of loan you qualify for is also the price of the house you must be at or below. This can help you stay within your budget and find a home within your means. Don’t forget, though, that the USDA loan is only for rural properties. You can use the USDA’s map to figure out if the home you want to buy is within their boundaries.