USDA Rural Development Guaranteed loans provide lucrative financing for families that fall into the low income bracket for their area. It is a great way to get a low rate and flexible qualification guidelines. The one caveat to the USDA RD loan program is that you must purchase or live in (for a refinance) a home in a eligible rural area. The USDA determines the areas considered rural for their loan program and the data changes periodically. If you want to know the exact boundaries at any given time, their website provides up-to-date information to help get you started. The loan application for the USDA program goes through the USDA approved lender of your choosing as well as the USDA as the lender has their own overlays they require for loan funding and the USDA has theirs as well. The funding comes directly from the USDA mortgage lender rather than any government agency – the USDA simply guarantees the loan should you default on your payments in the future. These loans are also referred as "Section 502 USDA Guaranteed Loans".
In order to apply for a USDA loan, you have to approach a USDA approved lender. Don’t assume that every lender in your area is approved for this loan type – you should ask around before you start applying. If you are unable to find a lender through your contacts or referrals, use our comprehensive directory on this site to do so quickly and easily. Once you find a lender or two you wish to apply with, you will need to fill out a loan application form. On this form, you will disclose all of your personal information that is necessary to determine if you qualify for the loan. Some of the information you will need to provide includes:
Once you sign and turn in the USDA application, the lender will pull your credit to make sure your credit score is not below 580 because if it is you are immediately ineligible for the USDA guaranteed loan program. In addition, the lender will determine if your income falls within the income guidelines for the USDA program. If you make too much, you will not be eligible for the program, but the lender can help you find a different rural home program if possible.
The underwriting process for USDA loans is somewhat similar to any other loan type. The approved USDA lender needs to determine your debt-to-income ratio to see if they line up with the USDA guidelines. The front-end ratio should be around 29 percent or lower, which means your total mortgage payment including taxes and insurance needs to be less than 29 percent of your eligibility income, otherwise known as your gross monthly income. In addition, your back-end ratio, or the total monthly debts cannot exceed 41 percent of your gross income unless you have a debt ratio waiver, which some lenders allow if you have a high credit score; stable income; or plenty of reserves on hand. While the lender evaluates your credit report for your current debts, they will look for any bankruptcies or foreclosures reporting. If this is the case, at least 3 years must elapse before you can apply for this program. In addition, if you have any unpaid collections, you must put a plan in place to either pay them off before you close on the loan or make a payment arrangement with the debtor. The only exception to this rule is any federal debts – they must be paid in full before you can get the loan.
In addition to your gross monthly income or eligibility income, the lender needs to determine your adjusted income. This is the number used to determine if you are eligible for the USDA program. Unlike other programs, if your income is too high, you will not qualify for the program as it is meant for low income families. The adjusted income is your gross monthly income minus any allowances which are as follows:
Once the lender determines that your income qualifies you for the program, they need to ensure that the property you purchase or refinance falls within the USDA rural boundaries. Because these boundaries change from time to time, even if you already have a USDA loan and wish to refinance, the lender must check the boundaries to ensure that you do not fall outside of them now.
Last, but not least, your home loan financing lender needs to look closely at your housing history. If your credit score is below 620, the last 12 months are the most important as if you have even one late housing payment during that time, you will not be eligible. If your score is over 620, however, the maximum amount of late housing payments allowed are 2 within the last 3 years. In addition, if you have more than one late payment on any other debts during the last 12 months, you are no longer eligible for the USDA RD loan program.
Closing on a loan with USDA lenders is the same as any other loan type. If you chose to pay your USDA closing costs upfront, you will have to bring cash to the closing table. This includes your funding fee of 2.75 percent of the loan amount. If you choose to wrap your funding fee and closing costs that include processing, underwriting, title, recording, and tax fees into the loan, you just bring yourself to the closing to sign the paperwork to fund and start your loan for your USDA purchase or refinance.