How to Apply for a USDA Loan

If you’re buying a home in a rural area, a USDA loan from the U.S. Department of Agriculture could make it easier to qualify for financing while also reducing your loan costs.

Note that USDA loans have some unique eligibility requirements and a slightly different application and approval process than conventional loans. Let’s walk through a step-by-step guide to help you determine if you qualify for a USDA loan and how to apply for one.

Who Is a USDA Loan For?

The U.S. Department of Agriculture offers USDA loans through its Section 502 Guaranteed Loan Program. This type of loan is designed to help low- and moderate-income borrowers in rural areas purchase adequate and safe housing.

To qualify for a USDA loan, you must have a household income that’s no more than 115% of the median household income in your area. You must also use the loan to purchase a primary residence that’s located in an eligible rural area. A USDA loan can be used to buy, build, rehabilitate, improve, or relocate a home.

How to Apply for a USDA Loan

Applying for a USDA loan is similar to applying for any other type of mortgage, but it may seem overwhelming if you’re doing it for the first time. The list below breaks down the six steps to apply for a USDA loan. We’ll go into more detail about each step in a later section.

1. Find a USDA lender. Unlike conventional loans, USDA loans aren’t available from all lenders. Instead, you’ll have to find one that offers this type of loan.
2. Get pre-approved for a USDA loan. Mortgage pre-approval can help guide your home-buying journey and make it easier to get a home.
3. Find a USDA-approved home. For USDA loans, there are strict requirements related to the location and condition of the home.
4. Sign and deliver a purchase agreement. Once you enter into a purchase agreement with a buyer, your USDA lender can consider your loan application.
5. Begin the underwriting process. Your lender will do a deep dive into your financial situation to ensure you’re able to repay your loan.
6. Get your loan approval and close on your home. The final step of getting a USDA loan is the closing, but first, you’ll have to get your final loan approval.

Preparing to Apply for a USDA Loan

If you’re planning to apply for a USDA loan, you should take several steps ahead of time to help you prepare for the application and improve your chances of being approved.

• Review your finances: Before completing any loan application, review your finances to ensure it’s the right decision for you. Review your budget to understand how much you can afford to spend on your monthly payments. Finally, consider whether there are any other financial priorities you should address before buying a home. 
• Check your credit: Your credit history is one of the most important factors for lenders reviewing your mortgage application. Check your credit report and score before applying for a USDA loan to ensure you have a good chance of approval. If not, consider postponing your home purchase to work on improving your credit score. You can check your credit report at AnnualCreditReport.com.
• Build savings: Although USDA loans don’t require a down payment like other loans do, it’s still important to have savings set aside. This money can improve your chances of getting a loan, help you pay for moving expenses, and serve as an emergency fund for any expected home repairs.
• Consider all loan types: While USDA loans are a great option for certain borrowers, it’s important to understand all of your options, such as VA loans or FHA loans.
• Gather documents: When you submit your USDA loan application, you’ll be required to submit various documents like pay stubs, tax returns, and asset and liability statements. The application process will go more smoothly if you’ve gathered these documents beforehand.

Applying for a USDA Loan

USDA loans have unique eligibility and approval requirements, and it’s important to understand how to apply for one properly. Let’s review each key step of the process.

Find a USDA Lender

To get a USDA loan, you must work with an approved lender. Most lenders list on their websites whether they offer USDA loans. The Department of Agriculture also maintains a list of lenders that currently offer these loans. If you live in a rural area and know others who have used USDA loans, a word-of-mouth recommendation could be a good starting point to narrow your list of potential lenders.

Get Pre-Approved for a USDA Loan

Pre-approval is an important step in buying a home for any type of mortgage. Lenders examine your finances and determine whether you’re eligible for a loan, as well as the loan amount and interest rate you may qualify for. Pre-approval can also make sellers more likely to accept your offer.

Find a USDA-Approved Home

To get a USDA loan, the home you’re purchasing must meet certain requirements. First, the house must be located in an eligible rural area. You can use the map provided by the Department of Agriculture to find eligible areas near you.

Sign and Deliver a Purchase Agreement

A purchase agreement is a contract between a home’s buyer and seller outlining the terms of the purchase. Before your USDA lender can start the mortgage approval process, you’ll need to enter into a purchase agreement with a seller and provide the information to the lender. The lender will need information about the home and the agreed-upon purchase price.

Begin the Underwriting Process

Mortgage underwriting is the process in which a lender reviews your financial information to ensure you’re eligible for a loan. It’s required for all mortgage applications, including for USDA loans. During the underwriting process, your lender will verify information about your employment, income, and credit history to determine your likely ability to repay. 

The mortgage lender will also verify information about the property. First, you’ll have to go through an appraisal to ascertain the home's value. Additionally, for a USDA loan, the lender will also ensure the home is in an eligible rural area and meets the Department of Agriculture’s property standards.

Get Your Loan Approval and Close on Your Home

Once your USDA lender has completed the underwriting process, you’ll receive your final approval and will be cleared to close on your home. 

The closing is the final step in the home-buying process. It’s when home ownership is transferred from the seller to the buyer. It’s also when you sign your final USDA loan documents. 

By closing on your loan, you’re entering into a contractual agreement with your lender, promising to repay the borrowed amount.

Alternatives to a USDA Loan

A USDA loan can be an excellent option for low- and moderate-income borrowers in rural areas who meet all of the program's requirements. However, it’s not the right loan program for everyone. Here are some alternatives to consider.

Conventional Loan

A conventional loan is any type not backed by a government program. It’s the most popular type of loan. Conventional loans require a credit score of at least 620, which is similar to what most USDA lenders require.

A key benefit is that conventional loans don’t have strict property standards like USDA loans, and they can be used in any state in the U.S. However, conventional loans do require a down payment, and if that down payment is lower than 20%, they also require private mortgage insurance. That’s not the case with USDA loans, although USDA loans do have an annual fee.

FHA Loan

Loans backed by the Federal Housing Administration (FHA) are another popular option among low- and moderate-income families, though the program doesn’t have an income limit like USDA loans do.

These loans offer lower credit score requirements than other loan programs, making them easier to qualify for. Depending on your down payment size, you could qualify with a credit score of either 500 or 580.

Loans insured by the FHA are more widely available than USDA loans. They are available nationwide and are offered by more lenders. However, they also require down payments and mortgage insurance premiums, which USDA loans don’t. 

VA Loan

Loans backed by the U.S. Department of Veterans Affairs offer many of the same benefits as USDA loans. Like USDA loans, VA loans offer 100% financing, meaning you don’t need a down payment. There’s also no mortgage insurance required like there is for conventional and FHA loans.

Frequently Asked Questions (FAQs)