USDA Loan Prequalification and Preapproval

What You'll Learn in This Article

• A Closer Look at USDA Loan Prequalification
• A Closer Look at USDA Loan Preapproval
• Why It’s a Good Idea to Get Prequalified or Preapproved
• What To Do If You Are Denied After Preapproval

Dreaming of an affordable home in a rural or suburban location? A USDA loan can help make it happen. But before shopping for an eligible residence, it’s a smart idea to pursue USDA loan prequalification or, better yet, preapproval.

Read on to better understand the differences between these two, why getting prequalified or preapproved is important, the steps involved, the documents you’ll need, and more.

A Closer Look at USDA Loan Prequalification

Prequalification is an informal estimate of what you could qualify for based on self-reported information. Think of it as a quick first step to gauge what you might afford.

“When you get prequalified, you share basic information, like your income, debts, and credit score, typically over the phone or online. The lender then gives you an estimate of your loan amount without verifying details,” explains Steven Glick, director of mortgage sales for HomeAbroad.

During the USDA loan prequalification process, you’ll complete the following steps:

1. Contact a USDA-approved lender.
2. Provide basic financial information, including details on gross monthly income, employment, assets, and monthly debts.
3. Undergo a credit check. During prequalification, the lender will likely perform a soft credit inquiry, which doesn't impact your credit score. But to obtain a more detailed look at your credit history, some lenders could request a hard credit inquiry during prequalification.
4. Receive an estimated loan amount – often within minutes.

The good news is that a loan prequalification can be completed in less than one day – often within minutes.

“Prequalification is super quick, often providing an estimate in an hour or less, especially if you do it online,” Glick notes.

You can begin to determine your affordability with this USDA loan calculator.

A Closer Look at USDA Loan Preapproval

USDA loan preapproval is a more serious step. Here, you submit necessary documents and the lender checks your credit, verifies your finances, and confirms your eligibility for a USDA home loan based on factors like your income and chosen location.

“Preapproval is a commitment in writing that involves verifying your documents, a credit check, and in some cases even underwriting,” says mortgage expert Andreis Bergeron with RedAwning.com. “It’s basically a lender saying, ‘Your approved – subject to the property details."

The steps involved with preapproval include:

1. Complete a full USDA mortgage loan application.
2. Provide supporting documents (more on this later).
3. Undergo a credit check. The lender will perform a hard credit pull, which can slightly lower your credit score – usually by no more than five points if it’s a single hard inquiry. This hard inquiry usually lowers your credit score for about a year. Although it remains on your credit report for two years, most credit scoring systems only count inquiries from the last 12 months when determining your score. “But if you are shopping among several different lenders, having your credit pulled by each of them could lead to a more significant drop in your credit score,” cautions Matt Schwartz, a mortgage broker with VA Loan Network, which handles USDA loans.
4. Receive a preapproval letter after the lender reviews your file. This letter is typically valid for between 60 and 90 days. Your real estate agent can provide a copy of this letter to a home seller to demonstrate your creditworthiness and seriousness as a buyer.

The preapproval process commonly takes one to three business days, per Brian Vaughan, a licensed loan officer and co-branch manager with Fairway Independent Mortgage Corporation. However, in some cases, it can take up to two weeks, depending on how quickly you furnish the necessary documents as well as the lender’s workload. Note that preapproval for a USDA loan is often more involved than for other types of mortgage loans. That’s because location eligibility and income limits need to be verified and credit standards could differ slightly from conventional, FHA, and other types of loans.

Once preapproved, you’ll know exactly how much of a home you can afford, and home sellers will have additional confidence in any offer you place. However, it’s important to remember that being preapproved does not guarantee a home loan. There are usually conditions that follow preapproval, which must be met for your underwriter to approve your USDA loan.

“Also, keep in mind that a USDA preapproval you receive is tied to that particular lender, and is only as reliable as the lender and loan officer who issued it,” says Schwartz.

Why It’s a Good Idea to Get Prequalified or Preapproved

Getting prequalified can help you establish realistic expectations early on in the process. It gives you a budget snapshot so that you’re not chasing homes you can’t afford.

“Think of it like a compass leading you in the right direction,” says Bergeron. “In contrast, preapproval is like the map. It signals to sellers and agents that you are serious and financially vetted, which can be vital in competitive rural markets.”

Getting at least prequalified or – even better – preapproved, checks several boxes, according to Vaughan.

“It shows sellers that you are eligible for financing, provides you with a clear budget, and helps catch credit and financial issues early. Without prequalification or preapproval, you could be wasting your time or you risk losing out on homes to better-prepared buyers,” he says.

Bergeron cautions that inventory can be tight in rural and suburban areas where USDA loans are common.

“I’ve seen deals evaporate because buyers didn’t get preapproved before making offers on USDA-eligible homes,” he says.

The Documents You’ll Need

While you won’t need to gather documents for USDA prequalification, important paperwork is required for preapproval. Prepare to collect and give your lender:

• Recent paystubs (usually the past 30 days) to verify income stability and current earnings
• Two recent years of W-2 forms
• Two years of tax returns for self-employment income
• Recent bank statements (usually the past 60 days) to demonstrate assets and reserves
• A government-issued photo ID for identity verification, such as your driver’s license or passport
• Your Social Security number/card
• Debt details, such as student loan statements
• Completion of a credit authorization form for permission to pull your credit.

“These documents ensure you will meet the USDA’s income limits and can handle loan repayment, preventing surprises during the loan underwriting process,” Glick continues.

What To Do If You Are Denied After Preapproval

Receiving full approval on a USDA loan isn’t a slam dunk, even if you’ve been preapproved. You can still get turned down for a loan later under certain conditions. Common reasons include:

• Losing your job or adding new debt, such as a car loan, which could throw off your debt-to-income ratio.
• Your household income exceeds the USDA income limits.
• The property is not located in a USDA-qualified rural area or it could fail the appraisal due to major repairs needed.
• New late payments or a drop in your credit score give the lender pause.
• Inaccurate or missing documents stall or stop the process.
• Your credit score dips beneath the lender’s acceptable threshold before closing.

“I’ve also seen USDA deals derail because the buyer’s non-borrowing spouse earned too much money or because a side gig wasn’t documented properly for a full two years,” says Schwartz. “Remember that lenders verify everything, but what most buyers miss is that the USDA counts total household income – not just earnings from the loan applicant.”

If you are ultimately denied a USDA loan, don’t lose hope. Ask the lender why.

“Then, work on fixing any issues – like improving your credit, paying down outstanding debt, and increasing your income,” suggests Vaughan.

If your earnings are too high, explore alternative financing, such as an FHA loan or conventional mortgage. If the problem is an ineligible property, look closer at USDA-eligible rural areas and choose a property that stands a better chance of passing the appraisal.

“If necessary, wait a few months, save more funds, strengthen your financial profile, and work with a USDA-savvy lender to reapply for a loan,” advises Glick.