The USDA loan process is similar to any other loan process in the beginning. You always want to start by getting preapproved by a lender so you know how much house you can afford. This helps to speed up the process once you find a home you wish to purchase and sign a sales contract. The prequalification process is very simple and does not take more than one day to complete, usually. It is the loan process itself that takes a little longer.
Two Steps to the Process
There are two steps in the USA loan process – the lender starts the process and the USDA completes it. The first part of the process is the same as you would undergo with any other loan – you must provide the lender with all of the pertinent documents that help to qualify you for the loan including your income documents (paystubs, W-2s, and tax returns) and any asset statements, if applicable. In addition, the lender will need to order an inspection and appraisal to ensure that the property meets the USDA and lender guidelines in order to be insured by the USDA.
Once the lender completes the process and has an entire loan package ready to go, the lender sends the package off to the USDA. The USDA typically takes about one week to go through the loan package and approve it for closing, but this can vary based on the volume they receive and the completion of the package the lender sends them.
The USDA Loan Approval Timeline
Below is the typical timeline for the USDA loan process from start to finish. Of course, this could vary by lender, but it is a general picture of what you can expect:
- Borrower obtains preapproval for a USDA loan based on the parameters provided, which gives him an idea of the amount of home he can afford.
- Borrower signs a purchase contract on a home within USDA boundaries as determined by the USDA website or the lender’s input, whichever is easier for the borrower.
- Borrower provides the lender with verification of the information provided for preapproval, such as income and asset documents.
- Lender orders necessary documents to solidify the loan package including title history, appraisal, and inspection.
- Lender completes the loan package and ensures that it meets the USDA guidelines.
- Lender sends the package off to the USDA.
- The USDA looks over the package and approves it for closing or asks for further information if the package is incomplete.
- The USDA issues the approval for the clear to close.
- The lender arranges the closing with the title company.
The timeline to close a USDA loan is based on many factors, not just the USDA turnaround times. Of course, the turnaround times play a large role in the process, but using a lender that is experienced in USDA loans is crucial to the success of the process. If you use a lender that has never processed a USDA loan or does not have extensive experience in them, you could wind up with a delayed process because of an incomplete package being sent to the USDA. Make sure you ask any lender you consider using about their experience with USDA loans so that you can make sure the process goes as smoothly as possible, enabling you to close on your USDA loan as quickly as possible.
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USDA Income Requirements
The USDA loan requirements that pertain to income are similar to that of FHA, VA, and even conventional loans. They want to make sure that you have a stable income that will continue for at least 3 years. This is proven by providing your most current 2 paystubs and your W-2s for the last 2 years. If you do not have the W-2s, you can allow the lender to perform a Verification of Employment which will verify your last two years’ income and verify that you are currently employed. If you are self-employed, there is no ability to get a VOE, so you will have to supply your 1040s with all of the schedules for the last 2 years in order for the lender to determine your income. If you receive alternate income, such as social security or disability, you will need to provide several things – the award letter, proof of continuance in the form of a letter, and proof of receipt which can be done with your bank statements. All income needs to show proof of future continuance.
The USDA does allow unique income circumstances, however. They allow part-time income if you have received it for at least 12 months; they accept future pay raises as long as they are happening within the next 2 months; they accept alimony and child support as long as you have been receiving it for 1 year and that it will continue for the next 3 years.
Something that is a little different than any other loan is the need to not exceed the income limits for your area. A median income is determined based on the cost of living in your area; you cannot exceed 115% of that income based on your gross monthly income minus any USDA allowances that you are eligible to receive. In other words, the income that the USDA uses to qualify your debt ratio is your eligibility income but the income that is used to ensure that you do not make too much money is your adjusted income.
Your adjusted income is your eligibility income minus these adjustments:
- $480 for every child dependent living with you
- $480 for any disabled family members living with you aside from any applicants
- $480 for any full-time students over the age of 18 living with you
- $400 for any person over the age of 62 living with you
Once these allowances are subtracted from your monthly income, you have your adjusted income, which must be within the limits set forth by the USDA.
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Maximum USDA Loan Size
In general, USDA loans are restricted to the price of the home, as they provide 100% financing. But they do have certain maximum loan sizes for each area of the United States. Because the loan is for those that are on the low to mid-range for income, the maximum amount for each area will be much less than would be the maximum for an FHA or conventional loan. Each county will have a differing maximum as is deemed necessary by the USDA. They figure the cost of living in each area as well as the average home price to determine the maximum for each county. The maximums are subject to change, which makes working with a knowledgeable USDA lender very important.
In addition to the county maximum for the area you are considering purchasing a home, the lender will need to determine your individual qualifying factors. You must meet certain USDA loan requirements in order to be eligible. These factors include the amount of your income versus the amount of your debt; the amount of assets you have; and your credit score. In addition, the appraised value of the home will play a role as you are only eligible for 100% of the appraised value of the home plus the cost of the upfront USDA fee. The USDA loan requirements are among the most flexible, but you must abide by their rules in order to qualify as they are offering a rather risky loan to borrowers.
Maximum Debt Ratios
Because USDA loans are meant to be affordable for those that have low-income levels, they are rather strict about the debt ratios. The USDA loan requirements state that debt ratios should remain within the 29/41 range. This means that your mortgage payments, which include all principal, interest, taxes, and any insurance, should not be more than 29 percent of your gross monthly income. The 41% means that your total monthly debt which includes your mortgage payment and any other monthly debt such as student loans, car payments, and credit card debt must not exceed 41% of your monthly income. These payments include any loan that has 6 months or more remaining in payments as well as any student loans that are deferred but will come due in the future. In some cases, the USDA is able to offer an exception for a higher debt ratio, but you must have compensating factors that enable the lender to feel that you will be able to keep up with your mortgage payments. These compensating factors include:
- Holding the same job for many years
- Having exceptional credit scores – typically over 660
- Having plenty of liquid assets to be used as reserves
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Closing Costs for USDA Loans
The closing costs you can expect to pay on a USDA loan are similar to almost any other loan. The costs typically depend on the lender that you use. You can feel free to shop with various lenders in order to find the costs that are most affordable to you. Aside from the upfront fee, the USDA does not have anything to do with the fees that are charged. A few of the typical closing costs that you will see including underwriting fees; credit report fees; document fees; title fees; inspection fees; appraisal fees; and origination fees.
Mortgage Insurance Requirements
USDA loan requirements make mortgage insurance a necessity. The money brought in from the insurance is what the USDA uses for its reserves should they need to pay for a loan that has defaulted. The mortgage insurance comes in two forms: the upfront fee and the annual mortgage insurance. The upfront fee is paid at the closing; however, most borrowers do not have the funds to pay the fee upfront, which is why the USDA allows it to be rolled into their loan, making their loan amount more than 100% of the purchase price of the home. The annual mortgage insurance is figured based on the loan amount and is divided up among the 12 payments each year. The calculations are figured as follows:
- 2.0% of the loan amount is the upfront fee
- 0.40% of the loan amount is charged annually and added to the monthly mortgage payment in 12 month increments
The USDA mortgage insurance rates are much lower than any other loan, including FHA, VA, and conventional, enabling USDA loans to remain affordable.
There are only certain lenders that are USDA approved, so make sure to shop around. Even if you do not have a lender in your immediate area that offers USDA loans, you can shop around with lenders in other areas as well. You never know where you will find the best rate and lowest fees to close this loan that requires no down payment and has flexible terms.