USDA loans offer 100% funding for rural homes. The program has flexible guidelines and affordable mortgage insurance. It’s geared for families with low to moderate income. It’s not enough to fall within a low income category, though. You must still prove you can afford the loan. Here are some simple ways to ensure you get approved for the USDA loan.
Choose Housing that Fits Within Your Budget
The USDA loan is to help borrowers secure safe and sanitary housing. A word they throw around a lot is modest. They aren’t going to finance an extravagant home. It should be enough to help your family feel comfortable. But it doesn’t need luxurious accommodations. Another way modest housing helps you get approved is the cost. The USDA prefers that your housing payment doesn’t exceed 29% of your gross monthly income. Finding a home that will have a payment that takes even less than 29% can help your chances of approval.
Have Consistent Income
Many loan programs prefer that you have a 2-year work history at the same company. This shows stability. The same is true for your income. If you hop from job to job, you aren’t going to have stable income. This shows lenders that you have some level of risk. Certain lenders may not care while others won’t approve your loan no matter how well you qualify for it. Consistent income goes a long way with lenders. It shows predictability which is something that helps lower the risk of default.
Have Clean Credit History
Your credit score doesn’t have to be high, but your history should be clean. Late payments blemishing your credit report only hurt your chances of approval. We are talking about the last 12 months here, though. If you had credit issues going back 2 or 3 years, it may not hurt your chances of approval. However, you must show you recovered from that time. If the last 12 months are free from late payments and new collections, your chances of getting approved increase.
Keep Your Credit Score Up
While you don’t need a high credit score, so to speak, the higher the better. Borrowers with a credit score lower than 620 go through a more intense process. Whereas borrowers with a score higher than 620 have a more streamlined process. Basically, the lender will evaluate your documents more closely. They may ask more questions and require more documents. It doesn’t mean you won’t secure an approval. It does mean it might take longer to get to the closing table.
Provide Proof of Your Assets
Technically, you don’t need to prove any assets for the USDA loan. They don’t require a down payment and reserves aren’t something lenders must see. But, if you pay your own closing costs, you must prove how you will pay them. There are options if you can’t pay them – the seller or even the lender can pay them. If you will pay them, make sure you have your last 2 months’ bank statements ready. Try to hold off on any large deposits or large expenditures during that time. Lenders will scrutinize everything on the statements. Large deposits will need to be tracked. Lenders need to make sure you didn’t take out a new loan. Large expenditures may need to be explained.
Choose a Home in Good Condition
As stated above, USDA loans are for safe and sanitary homes. The appraisal process is similar to the FHA’s process. The appraisal is the same as others. The difference is the appraiser must closely evaluate a few other areas that other programs don’t require. While you may not be an appraiser, you can tell with an untrained eye when a home is in decent or poor condition. A roof in disrepair, holes in the walls, or plumbing that’s not working will not pass the USDA appraisal. You may be able to get the seller to fix some things, but this will delay the process. Instead, opt for a house in good condition and get right to the closing.
The USDA does not fund USDA loans. They guarantee them for lenders, though. If you default on your loan, the USDA pays the lender back a portion of the money they lost. The USDA then takes over the home, trying to sell it and recoup the funds. Because of the USDA’s lack of funding, lenders can set their own requirements and interest rates. In short, you can shop around.
Checking with different lenders may provide you with more options for approval. It may also provide you with several interest rate quotes. This gives you more options to get approved. If your debt ratio is close to the maximum allowed, a lower interest rate can help your case. Some lenders also have higher thresholds for risk. What one lender turns down, another may accept. Unless you shop around with different lenders, you won’t know what options you have.
Overall, getting approved for the USDA loan is a simple process. Once you prove eligibility, the rest works much the same as any other loan. The difference is the flexibility the USDA offers. You prove eligibility by making sure your household income falls within the area’s allowed maximum. You can see the amounts here.
Without a need for a down payment, as long as you have decent credit and debt ratios no higher than 29/41, you may have an easy time securing USDA financing. Don’t forget about the lender overlays, though. If one lender turns you down, don’t give up. Instead, check with other lenders to see what options they have available for you. Oftentimes one lender will approve what another denied.