Buying a home is one of the single-largest investments in a person’s life – and also one of the most exciting. A home is more than a financial investment, but a step toward the American Dream, and the USDA loan program opens the door to homeownership for many who otherwise may not be able to qualify for home financing.
The process to get a USDA loan is similar to any other loan program out there, but comes with a few exceptions due to the government's guarantee. The general application process looks like this:
- Prequalify with a USDA-approved lender.
- Apply for preapproval.
- Find a USDA-approved home.
- Sign a purchase agreement.
- Go through processing and underwriting.
- Close on your loan.
To help potential homebuyers prepare for the USDA loan process, the major steps to getting a USDA loan are outlined below.
1) Find a Lender and Prequalify For a USDA Loan
The first step to getting a USDA loan is finding a USDA-approved lender. Hundreds of lenders make USDA loans, but some might only make a few of them every year. Working with a lender that specializes in this rural home program can make a big difference for homebuyers.
Once you've chosen a lender, it's time to get prequalified. Prequalifying for a USDA loan is a relatively simple task that provides a general estimate of what you can afford, and if you are even eligible for the program.
This vital step can save you significant time and effort by narrowing down what homes you may be able to purchase. During this step, your lender will discuss how much you can afford and alert you to any red flags that may hold you back from qualifying for a USDA loan.
Be prepared to answer some initial questions about your financial situation. Most lenders will focus on:
- How much you wish to borrow,
- Your gross monthly income and other assets, and
- Your total monthly debts.
Many lenders will also ask your permission to do a hard credit inquiry at this time. Prequalifying for a USDA loan will help to identify common income, debt or credit issues that could make closing on a USDA loan difficult.
For example, the USDA considers four different income calculations when determining a borrower's USDA income eligibility. Prequalification is an opportunity to review your qualifying income sources.
Depending on the lender, you may be able to obtain USDA prequalification and preapproval online.
2) USDA Loan Preapproval
Preapproval is a more thorough process than prequalification, taking into account your actual financial situation instead of mere estimates.
During this step, your lender will verify information about your income and finances. Some of the common documents that lenders require during preapproval include:
- W-2's and tax returns
- Pay stubs
- Photo ID
- Bank statements
- Social Security awards letter
During this stage, your lender will determine how much you can actually borrow by verifying income information and determining your debt-to-income (DTI) ratio, which shows how much of your monthly income is going towards expenses.
Lenders often look at two types of DTI ratios: a front-end ratio that considers only the new housing expense in relation to gross monthly income, and a back-end ratio that looks at all major monthly expenses in relation to gross monthly income.
For USDA loans, lenders often look at 39 percent for a front-end ratio and 41 percent for the back-end. But guidelines and caps on DTI ratios can very by lender and other factors, meaning it's possible to have a DTI above these benchmarks and still qualify for a USDA loan.
Getting preapproved is a critical step in the homebuying process. Home sellers and real estate agents want to see offers coming in from preapproved buyers. Having a preapproval letter in hand shows home sellers you're a strong and serious contender.
However, understand that preapproval does not mean you are guaranteed a USDA home loan. There are often supplemental conditions that must be met for final approval, including a satisfactory appraisal and further income and employment verification if necessary.
3) Find a USDA-Approved Home
If you haven’t already, find a knowledgeable real estate agent and start your home search. Finding a real estate agent with USDA loan experience can help you navigate the housing market to find homes that are eligible for USDA funding.
The USDA requires that all properties be located in a qualified "rural" area. In addition, the property must serve as your primary residence and meets all other property condition and use requirements set forth by the USDA and lender.
Armed with your preapproval letter, and the knowledge of what areas are eligible for a USDA loan, you and your agent will have no trouble securing your dream home.
4) Sign a Purchase Agreement
After you find the perfect home, you will work with your lender and agent to make an offer. This is the time to negotiate with the seller about covering some or all of your closing costs.
Once you and the seller sign a purchase agreement, your lender will order a USDA loan appraisal. Appraisals are different from a home inspection and are required by the USDA as a safeguard to the homebuyer. The appraiser will ensure the home is move-in ready and that the property meets USDA standards. If something does not meet standards, it must be fixed before closing.
5) Processing & Underwriting
Once you are under contract, an underwriter will review your information and examine the file to make sure your application and documentation are accurate and truthful.
The underwriting process for USDA loans can take longer than traditional mortgages because the program uses a two-party approval system. First, your lender will underwrite the loan file to ensure it meets all USDA requirements.
Then the USDA will underwrite the file, which is either done automatically or manually. The USDA requires a credit score of at least 640 to qualify for their automated system known as GUS.
Once underwriters are satisfied, you’ll move toward your final step: the loan closing.
Once the lender and the USDA sign off on your loan file, you'll receive a Clear to Close, which means you can head to closing day. At closing, you'll sign all of the necessary paperwork, finalize your USDA loan and take ownership of your new home.
How Long Do USDA Loans Take?
While the process to secure a USDA loan is a lot like other loan programs, the actual timeline can vary based on your financial situation, credit score and selected property.
The initial USDA appraisal can take up to a week to complete. If repairs are necessary then a secondary appraisal may also be required, which can delay your loan from progressing.
Further, if you do not qualify for GUS, the USDA will have to manually underwrite the loan application, which could in turn require additional time to gather needed verification.
Borrowers can typically expect the USDA loan process to take anywhere from 30 to 60 days, depending on the qualifying conditions.