The USDA home loan is one of the three current government-backed home loans. The other two are the VA loan and FHA program. They’re all considered government-backed because each provides some level of backing should an individual loan ever go into default as long as the lender approved the loan properly. The USDA loan has been around for several years and offers 100% financing, but unfortunately, it’s not used as often as it could be.
The USDA Rural Housing loan has two primary qualifications before the loan application can be evaluated by an approved USDA lender. First, the individual property must be located in an approved area. The USDA loan program is designed to provide financing for those wanting to purchase a home in a rural or semi-rural area as declared by the USDA. To find out if a particular property is in an approved zone, the buyer accesses the USDA website, enters the property address and receives the result. If the property is not located in an approved zone the loan application cannot be approved using USDA financing. Second, the household income cannot exceed certain levels, at approximately 115% of the median household income for the area. If both characteristics are met, then loan process can proceed.
Once this is complete lenders begin making two separate approvals. One for the borrowers and one for the subject property. The lender will order a credit report on all borrowers listed on the application and request credit scores for each from all three credit repositories. The lender will then use the lowest middle score of all those on the application.
To calculate income, the USDA needs the two most recent W2 forms of all borrowers along with copies of the home buyers most recent pay stubs covering a 60 day period. For those that are self-employed, guidelines ask for the two most recent federal income tax returns for both the business as well as personal.
The USDA home loan does not require a down payment, just like the VA loan program. But there will be closing costs involved and the lender needs to verify there are sufficient funds to close on a transaction. Applicants will be provided a Cost Estimate once a loan application and property address are submitted. These costs will be estimated charges the applicants can expect to pay for necessary third party services required to close the loan (appraisal, inspection, etc) In addition, there will be funds needed for an insurance policy as well as to fund escrow accounts used to pay the annual property tax bill when due as well as renew the homeowners insurance policy. To verify sufficient funds to close, lenders will ask for copies of the most recent set of bank or investment account statements to be used to pay for closing costs.
Regarding the subject property, the lender will order an appraisal from an appraisal management company. The appraiser will make a visit to the property, take pictures and make a general inspection. In addition, the appraiser will also research public records and the local multiple listing service to identify recent sales of similar properties in the area. These sales must be within the previous 12 months although there are exceptions that can be made, especially so as rural areas will by nature have fewer recent sales compared to an urban or suburban area.
Finally, once all the documentation is collected, the loan is transferred to the underwriting department who will evaluate the entire loan file and make sure the loan complies with USDA lending guidelines. Once that has been determined, loan papers are drawn and electronically delivered to the settlement agent for signature.
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