As part of its rural development mission, the Department of Agriculture offers no-down-payment loans for qualified buyers in certain towns. The USDA backs loans made by approved lenders, guaranteeing 90 percent repayment of a loan if the borrower defaults. The USDA loan approval process is similar to that of a regular loan from the borrower's perspective, but behind the scenes, it involves sending the loan package out to a regional USDA office for a final review and approval.
USDA loans are intended for borrowers with low to moderate incomes. The maximum loan amount for a USDA loan depends on where the property is located and the number of people in the borrower's household. The USDA updates its list of eligible areas annually. The program's main benefits include flexible credit-qualifying guidelines, no mortgage insurance payments, an unlimited seller-paid closing-cost credit, a fixed 30-year repayment term and competitive interest rates.
USDA Loan Protocol
Approved lenders facilitate the USDA loan approval process by taking your initial application and pre-screening you for approval. USDA lenders know the qualifying guidelines for borrower income, assets, credit and property criteria. The lender runs your credit and underwrites the application using your supporting financial documentation, such as pay stubs, tax returns and bank statements. It reviews the property appraisal to determine if it qualifies for the program and verifies your employment. A lender can generate a preapproval for a USDA loan using an automated underwriting system or a manual review by a staff underwriter, but ultimately the loan package must receive a stamp of approval from the USDA itself.
A USDA approval means that the department is committed to guaranteeing the loan once the lender funds it. The program relies on government funds and an annual budget. To gain USDA approval, the loan package must be approved when fiscal funds are still available. The fiscal year's budget ends on Sept. 30 each year, and it can take several months for new budget allocations. A borrower whose package arrives after funds have been depleted for the fiscal year may have to wait to gain USDA approval, which delays closing.
When funds run out, the USDA can issue a loan note guarantee subject to a new budget. The guarantee allows the lender to fund the loan based on this commitment, although most lenders don't fund with this approval because it requires the lender to wait for fund allocation. In the event that the USDA rejects the borrower's file and can't give a loan note guarantee, it gives the lender a specified and reasonable amount of time to satisfy or resolve the conditions that weren't previously met.
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