We’ve been talking about USDA home loans a lot on the Moreira Team Blog lately. They are sometimes overlooked by home buyers—and even some lenders—as a great option. As long as the buyer and the home qualify, the loans can be issued with up to 100% financing (no down payment). In addition, private mortgage insurance (PMI) is generally cheaper and interest rates are often better compared to conventional loans and other first-time buyer programs like FHA loans and VA loans.
So, how does the USDA home loan process work? Let’s take a look.
Truth be told, getting a USDA loan is a lot like getting any other mortgage loan. The process is essentially the same. The mortgage product itself just has its own rules and requirements.
USDA Home Loan Eligibility
USDA loans are backed by the United States Department of Agriculture (USDA) and are designed to promote economic development in more rural areas. That’s why the eligibility of the home is just as important as the borrower. The USDA offers a current eligibility map you can look at to see if the town you are buying in qualifies. It still does include some suburban towns and cities that may have grown since the last time they updated the map. You may be surprised at how many cities are eligible!
The home being purchased with a USDA loan must also be used as your primary residence to qualify. It cannot be a vacation home or investment property.
Assuming the home is in an eligible location, you will need to qualify as a borrower. There are income limits (also based on where you are buying) and other restrictions. These loans are reserved for lower-income home buyers who may not otherwise be able to afford a property.
USDA Home Loan Process
Beyond the qualification standards, here is a simple breakdown of the USDA loan process you can expect with most mortgage lenders:
- Application—Submit your loan application to a USDA-approved lender. Not all lenders are authorized to issue USDA loans.
- Financial Documentation—Provide the lender with all requested financial statements and documentation to prove employment, income, credit score, etc.
- Pre-Approval—The lender will review all your information and, if you qualify, will provide you with a mortgage pre-approval letter. This process may take a few days or as long as a week, but it is an important step to ensure you qualify and also to let you know how much home you can afford.
- Home Search—Now, you can start your home search in a USDA-eligible area and start making offers.
- Appraisal—Once you have an offer accepted and officially begin the closing process, the lender will order a home appraisal to determine the current fair-market value of the home. They are doing this to make sure the property is worth the amount of the loan being issued. If not, they may not be willing to take the risk.
- USDA Approval—The lender will also send off the loan file to your state’s USDA office, where it will need final approval from the USDA. This is another process that can take a few days or span a few weeks depending on various factors.
- Closing Documents—Once the loan is approved for funding, the closing documents will be sent by the lender to the escrow company for you to sign.
- Finalization—Once all the other steps are completed, the loan is ultimately finalized and you will get the keys to your new house.
USDA Home Loan Approval
One important step to note above is #6. This is the one point where a USDA loan will differ than most other types of mortgages. This is an extra step where the loan file is sent to the state’s USDA office for review and final approval. As a home buyer seeking a USDA loan, you should budget some additional time for this stage as it may extend the closing process by several days at the minimum (or possibly even several weeks, if things don’t go as smoothly). Your lender should be able to give you a realistic timeline of what to expect through every step of the loan approval process.
If you are buying a home and think that you and your area might qualify for a USDA home loan, contact your lender to get started with the application and pre-approval processes. If you are buying in the eligible parts of greater Atlanta or the surrounding rural counties, contact Moreira Team today to see if a USDA loan is right for you. We are a USDA-approved mortgage lender and we can help you explore all your home financing options.