USDA loans are government-backed and designed to help lower-and-middle-income people buy homes in rural and suburban areas. They’re a great resource for qualified borrowers because they offer a path to homeownership with competitive interest rates that don’t require pristine credit or savings for a down payment.
To be eligible, a borrower has to meet broad-based income, employment, and credit requirements. The property also has to meet certain requirements – namely, that it’s safe and structurally sound and in what the USDA considers a qualified rural area.
Every prospective homebuyer’s situation is different. Borrowers need to meet guidelines set by both the USDA and by individual lenders. While the government backs these loans, it doesn’t make them, and that means lenders can put in place additional requirements.
Whether your loan file is moving through the USDA’s automated underwriting system or being underwritten manually, there are some common issues that can lead to a loan denial.
Broadly, here’s a look at some potential reasons for a loan denial:
1. Income and debt issues. Things like unverifiable income, undisclosed debt, or even just having too much household income for your area can cause a loan to be denied. Talk with a USDA loan specialist to get a clear sense of your income and debt situation and what might be possible.
2. Change in employment. If you lost your job or changed jobs in the middle of the application process, that can be a red flag. The USDA requires you to have a regular source of income, so if you’ve lost your job or been laid off, you may no longer qualify. On the other hand, there are maximum income requirements for USDA loans, so if you got a great new job with a great new paycheck, you may now be making too much money to qualify.
3. Change in credit score. You’ll need to meet a lender’s credit score benchmark in order to start the process. But changes to your credit profile once you’ve started can also lead to problems. If you’ve had bills sent to collections, opened up a bunch of new lines of credit, or done anything else that affects your credit score negatively, that could cause your application to be denied.
4. Change in debt-to-income ratio. Buying a bunch of new furniture for your new home on credit? That’s a no-no during the loan process. If you’ve taken on new debt for any reason, whether it’s buying a new car, taking out a personal loan, or just charging a lot on your credit card, that can be a cause for denial.
5. The house you want isn’t USDA-eligible. Buyers need to purchase homes in qualified rural areas. Most of the country fits this definition, but there are parts of the country that are not eligible for USDA-backed mortgages. Check with a loan specialist at the outset of your homebuying journey to ensure you’re looking at eligible properties.
6. Appraisal problems. To get approved for a USDA loan, you must have the property you’re buying appraised. Unlike with a conventional loan, a USDA appraiser will check to ensure the home meets some broad property condition requirements in addition to assigning a value to the home.
If the property you’re buying doesn’t meet the requirements, which include things like being in livable condition, with a functional roof, foundation, electrical, plumbing, and HVAC systems, repairs will need to be made or the loan won’t move forward.
Another problem you can have with the appraisal is if your appraised value came in too low. Appraisers determine the value of the home by comparing it to similar properties in the area. If home values are declining or if there have recently been lots of foreclosures nearby, that can hurt the appraised value of the home.
If you’re under contract to buy a home for $150,000 but the appraiser determined the home’s value at $140,000, you either have to supply the additional $10,000 in cash or renegotiate the offer.
7. Interest rates have gone up. If interest rates have gone up since your preapproval and you were right on the border of being approved, that increase in your monthly housing costs could affect your affordability ratios.
If your loan was denied in automatic underwriting, you can still try to get approved with manual underwriting. Reach out to your lender and ensure they are able to manually underwrite your loan application. If not, you might need to find another lender.
Manual underwriting will involve providing documentation and explanations for whatever GUS flagged as problematic in your loan application. You’ll also typically encounter stricter guidelines with a manual underwrite.
If you have been denied in manual underwriting or told that you won’t be able to be approved with your current application, talk to your loan officer about what you can do to change your situation.
It may be that you need to find a different property, improve your credit score, or pay off some debt before you’re eligible for a USDA loan. Or you may find that there’s another loan that’s better suited for you.
Either way, find out as much as you can from your lender, so that you can start working toward successfully buying a home.