6 Questions for the Lender When Getting a USDA Loan

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 considering a USDA loan should shop around by comparing various lenders and asking them numerous questions. Here are some topics to hit to help you figure out if a particular lender is right for you.

1. What lenders offer USDA loans?

First off, homebuyers should check that the lender they’re considering working with actually offers USDA loans, since not all do.

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 applying 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 then 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. Now, how do I get a USDA Loan?

The first step after deciding which type of USDA loan to get is to fill out the application and confirm your eligibility, as well as the eligibility of the location. A lender can help you get the ball rolling if you're unsure where to start.

“If you live in an area where you can get a USDA loan and you're looking to purchase a home, even if you think, like, 'Oh, there's no way I could qualify,' there's certainly no harm in reaching out,” explains Jake Vehige, president of mortgage lending at Neighbors Bank. “ It is not as scary as it might appear.”

4. Does your company underwrite USDA loans regularly?

It is vitally important to make sure a lender is highly familiar with the underwriting guidelines and procedures specific to USDA loans. Working with a lender who understands the nuances of these specialized mortgages can help ensure you receive the full benefits the program offers.

Unlike conventional, FHA, or VA loans—which typically rely on Fannie Mae or Freddie Mac automated underwriting systems—USDA loans must be processed through the USDA’s proprietary Guaranteed Underwriting System). Lenders who are not accustomed to these additional steps may overlook critical requirements.

When a homebuyer goes under contract with a lender that lacks experience with USDA loans, unexpected issues can arise later in the process, potentially causing the loan to fall through altogether.

To avoid this, borrowers may want to ask prospective lenders how much of their business involves USDA loans or whether they have loan officers with specialized USDA training.

USDA loans are not only limited to specific geographic areas, but they also impose income caps and often evaluate credit profiles and debt-to-income ratios differently than FHA or conventional loans. Because of these distinctions, it’s especially important to work with a lender who has deep experience handling USDA loan applications.

5. 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.

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.

6. What terms are you offering along with the USDA loan?

In addition to asking about eligibility requirements, buyers need to understand the specific terms each lender is offering.

Although USDA loan income limits are standardized, interest rates and loan terms can vary by lender. While the rate offered may initially be variable during the application process, once the borrower and lender agree on a rate, it is fixed for the life of the loan. USDA loans do not offer adjustable-rate mortgage options.

After determining that a USDA loan is the right fit, borrowers should ask about the interest rate and request a formal loan estimate. It’s also smart to clarify how long an appraisal remains valid and what the typical loan processing timeline looks like.

In most cases, the loan should be processed within 180 days of closing. Borrowers should also make a point to ask about all associated costs and fees. Because rates and terms can differ from one lender to another, comparing offers can help ensure the most favorable outcome.

Dina Sartore-Bodo contributed to this report.