USDA Underwriting Guidelines Timeline and Process

Are you eager to apply for or get approved for a USDA home loan? It’s natural to wonder how long the process takes and who ultimately approves the financing. The answers involve underwriting, the process by which a lender evaluates borrower risk and eligibility for a specific loan program.

Underwriting has multiple stages and layers. Depending on the type of loan, you might need to meet certain eligibility requirements. Additionally, lenders can have their own guidelines that you must meet. For most homebuyers, the first layer of underwriting they encounter is through an automated underwriting system, of which there are several types. These computer programs basically evaluate your credit and financial profile to make a preliminary judgment about your loan file. USDA lending utilizes an automated system known as the Guaranteed Underwriting System (GUS).

Curious how GUS underwriting works and its requirements? Let’s take a closer look.

Understanding GUS

An automated underwriting system like GUS is a computerized digital tool lenders use to instantly assess a mortgage application by analyzing a borrower’s financial and property information against set underwriting guidelines. It quickly evaluates risk and eligibility, providing a recommendation that speeds up the loan approval process compared to manual review.

GUS was created to automate the credit risk evaluation process for USDA loans, thus speeding up the approval process for USDA borrowers. It uses a scorecard system and built-in rules to automatically greenlight or turn down an applicant’s loan for underwriting.

“GUS processes financial and property data to determine eligibility and provides a recommendation: either accept, refer, or ineligible,” explains Steven Glick, director of mortgage sales for HomeAbroad. “The goal is to ensure you can afford the loan and the property qualifies under USDA guidelines. But manual underwriting may be used if deeper review is needed.”

Unlike conventional loans, USDA underwriting must follow both lender guidelines and those set by the USDA Rural Development Program.

“Your loan must pass an internal lender review and, if it’s not automatically approved through GUS, also get an official stamp of approval from the USDA,” notes Alex MacLagan, senior loan officer with MacLagan Home Loans.

GUS Requirements

GUS judges applicants based on several different factors, including:

• Household income: This must not exceed 115% of the area’s median income, verified through documents like pay stubs and tax returns.
• Monthly housing expenses: What you pay monthly on housing costs, also referred to as “PITI” (loan principal, interest, taxes, and homeowners insurance) and your payment-to-income ratio, typically cannot exceed 34% of your gross income, ensuring affordability based on your front-end debt-to-income (DTI) ratio.
• Total monthly debts: Including housing, these should generally stay under 41% of gross income, using a back-end DTI calculation from financial records. Your DTI ratio measures how much of your income covers all monthly debts, including the new mortgage, and helps the lender determine if you can comfortably afford the loan without taking on more debt than you can manage.
• Location: The property must be located in a USDA-eligible rural area, confirmed through the USDA’s property eligibility map.
• Credit score: A minimum credit score of 640 is recommended for automated approval. Lower scores require manual underwriting and additional documentation.
• Citizenship status: Applicants must be U.S. citizens, qualified non-citizens, or lawful permanent residents.
• Loan limit: There’s no official USDA loan limit, but the maximum amount you can borrow must be reasonable based on affordability, income, and DTI guidelines.
• Extra savings: Cash reserves are not required, though additional savings strengthen your application.

“For a streamlined, automated GUS approval, these conditions should be met,” adds MacLagan. “Meeting these helps your file fall into the ‘Accept’ recommendation category, which avoids the need for a USDA reviewer to manually check your loan.”

GUS Recommendations

As mentioned, once GUS has evaluated your file, it will offer a recommendation based on your assessed risk and underwriting potential. The four different GUS recommendations are:

• Accept – This means your credit risk is “acceptable” under USDA underwriting guidelines. It’s not an official loan approval, but it allows your loan to move to the next step in the approval process. “This is the gold standard for the fastest closings,” MacLagan points out.
• Refer – Refer means that potential risks have been identified. A human underwriter should review your case to further assess your loan file. “Refer means the application requires manual underwriting due to factors like a credit score below 640 or high debt ratios, requiring additional documentation or analysis,” says Glick.
• Refer with caution – This recommendation means GUS has found multiple layers of risk and that a thorough human underwriter evaluation is required to proceed. “This recommendation is often a dealbreaker unless a serious error in the file is corrected,” cautions MacLagan.
• Ineligible – An ineligible recommendation means your loan file doesn’t meet USDA regulations, and you are unable to move forward. The property being purchased may also be located in an ineligible area.

Underwriting Evaluations

There are also three different types of underwriting recommendations. These ensure you and your loan adhere to USDA loan regulations and that the property is located in a USDA-eligible area.

The three possible recommendations are:

1. Eligible - This means the loan, property, and applicant meet all regulatory requirements to qualify for the USDA loan. “Eligible indicates that your loan can proceed toward approval, pending final verifications,” Glick continues.
2. Ineligible - An ineligible recommendation indicates that one or more regulatory requirements have not been met. “For example, your property isn’t located in a USDA-approved zone or your household income is too high,” MacLagan says.
3. Unable to determine - This recommendation typically means the property cannot be located, or other issues exist in the application. GUS is unable to make an official recommendation until the errors are fixed.

Once all the underwriting reviews are completed, the USDA will label your loan application as either eligible, ineligible, or unable to determine.

GUS Resubmission Policy

What happens if GUS doesn’t ultimately approve your loan for automatic underwriting? Fortunately, you can pursue a plan B. So long as you and your desired property qualify based on USDA requirements, you can resubmit your application for manual underwriting, which involves a human underwriter evaluating your loan file personally and by hand.

“Resubmission addresses issues like a Refer or Ineligible recommendation or updates your application to reflect new information – potentially improving the outcome,” says Glick.

You can request manual underwriting if:

• Your income, assets, or debts have increased or decreased. “Increases or decreases in earnings or assets affect your eligibility and DTI ratios, requiring updated financial documents,” Glick adds.
• You’ve added or removed a borrower from your application.
• You’ve corrected data entry errors.
• Your loan amount or interest rate has changed, which can impact DTI and affordability, requiring reevaluation.
• The property’s sales price or value has changed. “A new sales price or appraisal will affect your loan-to-value ratio, prompting a resubmission,” says Glick.
• You’ve experienced some other change that would negatively impact your ability to repay the mortgage. “New debts or financial changes that could hinder loan repayment will trigger resubmission,” Glick continues, “often for manual underwriting to assess compensating factors.”

Keep in mind that manual underwriting has stricter requirements.

How Long Does USDA Underwriting Take?

USDA underwriting can take longer than traditional mortgage loans, as it must go through a two-party approval system. Once the USDA-participating lender has underwritten and approved the loan, the state’s USDA office must also approve it. Depending on the state and other factors, this can add extra time to the closing process.

“The lender’s underwriting process typically takes five to 10 business days. Loan applications with a GUS Accept recommendation could be processed in as little as three to five days. But manual underwriting or resubmission can extend the timeline to 10 to 15 days,” says Glick. “After this, the USDA’s review for final approval often adds two to five business days, depending on their workload and the application’s complexity.”

Your USDA loan could take seven to 20 business days in total, including the lender’s underwriting and separate USDA approval. Note that resubmitting for manual underwriting can add extra time to USDA loan approvals.

“Although it generally takes a little longer for USDA loan underwriters to receive and verify all of the documentation, the process is actually not nearly as long as it takes for an FHA loan or conventional mortgage loan that has conditions attached,” says Dennis Shirshikov, a professor of finance and economics at City University of New York Queens College. “Thankfully, GUS has made this process more efficient and streamlined, resulting in faster approval when the borrower is a creditworthy and uncomplicated candidate.”