When it comes to choosing the right mortgage for your home purchase, there are many factors to consider, including the interest rate, terms of the loan, qualifying criteria, and finding the best possible lender for your needs.
For those who meet the eligibility requirements, a USDA loan is a smart option since most of these loans can be 100% financed, requiring low or no down payments.
Just like any other mortgage seeker, however, individuals thinking of trying for a USDA loan should shop around, comparing various lenders by asking them lots of questions. Here are some topics to hit to help you figure out if a particular lender is right for you.
1. Does your company offer USDA loans?
First off, homebuyers should check that the lender they’re considering working with actually offers USDA loans, since not all do.
“Some lenders don’t participate in the program at all or do so only in certain states,” says Sue Barber, national sales manager for Wells Fargo Home Lending.“If you work with a lender that doesn’t participate, you won’t have access to a program that might be a great fit for your needs.”
There are lists of USDA-approved lenders on the USDA’s website, which is also a great place for homebuyers to start their search for the right mortgage company for them.
2. Do I qualify for a USDA loan, and which kind?
There are two types of USDA loans: direct and guaranteed.
Direct loans, as the name suggests, are handled by the United States Department of Agriculture. These loans are for low-income applicants who would likely not qualify for a regular mortgage.
If you are in this category, a lender should advise you to pursue a USDA loan by filing an application directly through the USDA portal, since USDA-approved lenders do not handle this type of loan.
However, if you qualify for a USDA guaranteed loan, then an approved lender should be able to help you determine if this is a type of loan that might work for you, and process the paperwork.
Any interested applicants can also do a little research on their own on the USDA website before going to a lender to see if they (and the property being considered) meet the minimum criteria set by the USDA for these specialized loans.
3. Does your company underwrite USDA loans regularly?
It is vitally important to make sure that a lender is very familiar with the underwriting guidelines and procedures for USDA loans. Working with a lender who knows the ins and outs of these specialized mortgages will help guarantee you get the most benefit out of the program.
“While most conventional, FHA, and VA loans use the same Fannie Mae or Freddie Mac automated underwriting services, USDA loans must be run through their proprietary GUS, or Guaranteed Underwriting System,” explains Tan Tunador, a senior loan officer with Atlantic Coast Mortgage in Loudon County, VA.
“If a home shopper contracts on a house and is working with a lender who doesn’t go through the extra USDA steps, the future homeowner may be in for a shock,” Tunador explains. That is, when the loan doesn’t go through.
As a result of this, some other questions you could ask might include “How much of your business comes from USDA loans?” or even “Do you have any lending agents with specialized training in USDA loans?”
“USDA loans are not only area-specific but also have geographic income limits, and most of the time, treat credit and debt-to-income numbers differently than a more typical FHA or conventional loans,” says Tunador.
As a result, you want someone who is very familiar with this type of loan working on your own application.
4. What’s the income limit for USDA loans in my purchase area?
As previously mentioned, there are income limits for any individuals applying for USDA loans. These limits vary greatly by location, however.
To ensure that these loans are going to the intended recipients, the USDA stipulates that household income may not exceed 115% of the median income in the area.
In order to adjust for regional differences, the USDA will also consider location and household size when comparing your total qualifying income with the regional median to determine eligibility.
A good USDA-approved lender should be able to help you find this information and see how you stack up.
5. What do I need to qualify for a USDA loan with your company?
While the general criteria necessary to qualify for a USDA loan are set by this government agency, there is sometimes variability in what different lenders require. Even though lenders know the loan is guaranteed by the USDA, they are still obviously looking to make sure they have a qualified applicant.
“The government entity sets up the guidelines and requirements, but the private lender may often manipulate those limitations to stricter or more lenient requirements, and it changes from one lender to another,” says real estate agent and mortgage loan officer Orli Dudaie, author of “Your Home, Your Money.”
For example, Dudaie says, she saw one company requiring a credit score above 640, while another company required only 580.
As a result, good questions to ask of different USDA-approved lenders might include “What is the maximum debt-to-income ratio you’ll accept for me to qualify for this loan?” and “What is the lowest credit score you’ll allow?”
Barber, of Wells Fargo, says customers must also be prepared to show they have a steady income and enough savings/assets to make mortgage payments for at least 12 months.
6. What terms are you offering along with the USDA loan?
In the same vein as asking about varying qualifications, it’s important to find out what terms each lender is offering.
While baseline income limit percentages for USDA loans don’t vary, the interest rate and terms a lender offers can fluctuate. And though the interest rate might be variable, once it’s decided upon between the lender and customer, it will be fixed for the term of the loan. (This means there are no adjustable-rate mortgages for USDA loans.)
“Once you’re sure this is the right type of mortgage for you, you should inquire about your interest rate and ask for a loan estimate,” advisesJill Gonzalez, an analyst for WalletHub. “Another important questionis how long is an appraisal valid,and what is the loan processing time?”
Gonzalez says loan processing should be completed within 180 days of a loan closing. And always be sure to ask any lender what costs and fees are associated with the loan.
“It is important to let borrowers know that the terms and rates can change from lender to lender,” says Dudaie.
