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The USDA loan program is a type of mortgage offered by the United States Department of Agriculture (USDA) to help low-to-moderate-income borrowers in eligible rural and suburban areas become homeowners. We’ll discuss the difference between USDA loan prequalification and preapproval, the loan approval timeline, and some reasons why your application may be denied.
Prequalification is Not the Same as Preapproval
Prequalification and preapproval are both steps in the USDA loan process, but they are not the same. Prequalification relies on borrower-provided estimates to determine how much house they can afford and if they meet basic eligibility requirements. Preapproval is based on the supporting documentation borrowers provide their lenders such as paystubs and W-2s.
USDA Loan Prequalifications
Prequalification happens soon after a borrower submits their application to a USDA-approved lender. Lenders will also ask for additional information to make sure you meet basic USDA loan eligibility requirements.
Basic USDA eligibility requirements address key areas like price range, location and your overall financial health:
- Desired house price
- Desired loan term
- Desired property type
- The property's intended use
- Credit score
Your household income cannot exceed the limit to be eligible for a USDA loan. USDA income limits vary by household size and where you plan to purchase. The property must be located in an eligible rural or suburban area also set by the USDA.
Prequalification is a preliminary step and does not guarantee your approval for a USDA loan. Preapproval is given when your lender accepts the documentation you provide to support the income, credit and assets on your application.
USDA Loan Preapproval
Preapprovals for USDA home loans can only be issued by USDA-approved lenders.
USDA loan preapprovals can typically be issued once your lender receives the follow supporting documentation can only be issued after your lender receives supporting documentation typically call the following kinds of documentation:
- Proof of income using paystubs, tax returns, W-2s, and bank statements.
- Employment verification may be provided through documentation such as a letter from your employer or recent paystubs.
- Credit history requires authorization for the lender to pull your credit report and provide documentation to support any outstanding debts or credit issues.
- Asset documentation showing reserves with bank, investment, or retirement account statements.
- Other documentation at your lender’s discretion to verify your identity or any incomplete information from your application, such as a copy of your driver's license or social security card.
Once you have provided all the required documentation, the lender will review your application and determine if you meet the eligibility requirements for a USDA loan. Upon meeting the necessary preapproval criteria, the lender will provide a letter outlining your loan amount, interest rate, and other mortgage terms. This letter can help you demonstrate to sellers that you are a serious buyer who is ready to purchase a home.
How long does a USDA approval take?
The timeline for USDA loan approval can vary depending on several factors, including the lender's processing times, the complexity of your application, and any backlogs in the USDA loan program. However, there are a few general timelines that can give you an idea of how long the process might take:
- Prequalification can usually be completed in minutes, either online or over the phone with your lender.
- Preapproval for a USDA loan can take a bit longer, depending on how long it takes to provide your lender with the necessary documentation to verify the information in your application. If you meet the minimum requirements, your lender should be able to issue a preapproval letter within a few days, sometimes within a single business day.
- Underwriting occurs once you find a property and send the signed purchase agreement to your lender. Underwriting will thoroughly review your entire loan application against lender and USDA guidelines to make a final decision. This typically takes around 30-45 days.
The entire USDA home loan process can take anywhere from four to ten weeks all circumstances considered. It's a good idea to stay in touch with your lender throughout the process to ensure everything is moving along in a timely manner.
Why would a USDA Loan be denied?
USDA loan applications can be denied in some instances. Beyond the financial side of your loan application, property location and condition can be cause for denial.
You Don’t Meet the USDA Loan Financial Requirements
Your household’s total income must fall below the USDA income limitations based on where you live and your household size. If you don’t fall within income limits for the USDA home loan program, your loan can be denied. This does not mean you cannot apply for other home loan options you might qualify for.
Credit score and credit history requirements are set by lenders. Poor credit scores, late payments, delinquencies, collections, or bankruptcies can be cause for denial.
Your debt-to-income ratio (DTI) is another important factor in determining your eligibility for a USDA or any home loan. If your total monthly obligations outweigh your income, you may not qualify.
The Property Isn’t USDA Eligible
The property must be located in a USDA-eligible rural or suburban area. Your application may be denied if the property is not in an eligible area. It’s a good idea to check to be sure the property is USDA-eligible area before getting this far.
The Documents You Provided are Insufficient
If any supporting documentation provided is incomplete, inaccurate, or you aren’t able to provide it at all, your loan application can be denied.