How to Know Whether a Client Qualifies for a USDA Loan

As a mortgage loan officer (MLO), you will have clients in all different types of situations. They will be looking to you to provide the information they need to make an informed decision about how they’ll finance their home.

A conventional loan may not be the right answer for every client. For example, if you have clients in rural or suburban areas, you might want to explore a USDA loan. Here’s the information you need to determine if your client would qualify.

What is a USDA Loan?

The United States Department of Agriculture (USDA) manages programs related to agriculture, food, nutrition, natural resources, and rural development. The USDA Rural Development is a division of the USDA. This division is responsible for a variety of things, including creating and managing USDA home loans.

The term “USDA home loan” leads some people to assume that the loans are for farmers and homebuyers in other agricultural occupations. However, the fact is that USDA loans are for suburban and rural areas. Within that definition, approximately 97 percent of the land in the United States qualifies for USDA loans.

There are two types of USDA loans, direct and guaranteed. USDA direct loans are designed for low-income homebuyers with specific characteristics. The homebuyer’s local Rural Development Office processes these loans. As an MLO, you’ll only be dealing with guaranteed loans.

Guaranteed loans have specific characteristics, including:

• Up to 100 percent financing
• Loans are at a fixed rate for a term of 15 or 30 years
• Interest rates for USDA loans are typically lower than average
• Private Mortgage Insurance (PMI) is required – an upfront fee and an annual premium that is part of a buyer’s monthly payment
• Borrowers can include a number of expenses as part of the finance amount, including: closing costs, repairs, accessories to make the home accessible, and energy efficiency upgrades
• Refinancing is allowed
• Self-employed borrowers may apply

What are the USDA Guaranteed Loan Eligibility Requirements?

Here’s how to tell if a client is eligible for a USDA guaranteed loan. They and the home must meet the following requirements:

• The home must be in an approved suburban or rural location
• The home must be the homebuyer’s primary residence
• The home must be in good repair
• The homebuyer must be a US citizen or a permanent resident
• The homebuyer must have a credit score of at least 640
• The homebuyer’s income must be at or below 115 percent of the median income for the area
• The homebuyer must have a debt ratio that is acceptable to the lender

These are the key requirements. There are other somewhat obscure requirements, such as the home can’t get its water from a community well. Therefore, you need to do an appropriate level of due diligence to ensure that the loan processing goes smoothly. If you have questions, you can get in touch with the USDA guaranteed loan contact for your state.

You can also check to determine if a home is in one of the approved areas by searching for the address on the USDA Rural Development website.

When to Suggest a USDA Loan

If your client meets the eligibility requirements, there are good reasons to consider a USDA loan, including:

• No down payment is necessary
• The interest rates are very competitive
• PMI is less costly than FHA and VA loans
• Homebuyers with credit scores lower than 640 may be considered

Final Thoughts

Many MLOs don’t consider USDA loans on a regular basis. However, if you want to be a mortgage loan officer who excels at your job, you could become a hero to your clients by suggesting a USDA loan as an option. These loans offer many benefits to the right borrower.