The USDA loan program is the ideal choice to finance a property located in an eligible area for those who need or want a mortgage with little or nothing down. It’s even better than the FHA loan which requires a 3.5 percent down payment. Or the conventional 97 from Fannie Mae with a 3.0 percent down payment requirement. For those having trouble saving up enough for a down payment, the USDA program simply can’t be beat. However, there are some guidelines that USDA lenders are in fact required to follow and not every loan gets approved.
However, if you receive a preapproval letter from a qualified USDA lender, getting a loan turned down after your loan application has been reviewed then either the lender made a mistake or things changed since the original loan application was submitted.
First and foremost, don’t work with a mortgage company with little or no experience in USDA lending. USDA loans aren’t that difficult to approve but they do have their own unique requirements. If the lender suggests another loan type, such as an FHA loan, it’s a clue the lender is trying to steer you to a more familiar product.
If there’s one word of advice to avoid getting your loan turned down, it’s the quality and experience of your lender. Such lenders don’t issue preapproval based upon a hunch.
USDA loans ask that the monthly income of everyone in the household 18 or over be used and cannot be more than 115% of the median income for the area. Mistakes can happen when the income is not properly calculated. It’s more than just adding up everyone’s pay check and researching the median income for the area in which you intend to live. Again, an experienced USDA lender will apply the proper technique.
There are mortgage programs designed for first timers and others that do have an income limitation and doesn’t take into account factors such as older borrowers, the disabled and which incomes will be used for the calculation.
Another reason your loan can get turned down is due to a change in your income. You can also be turned down if you don’t make enough money. Did someone on the application get laid off or have their hours reduced? Lenders will collect your most recent pay check stubs but can also request that same information right before you close to make sure there were no significant changes in income.
Did you buy something on credit or pull a cash advance from a credit card in between the time you first submitted your application and near closing? Taking on additional debt will affect your debt ratios and a lender will run one final credit report right before printing out your loan documents. If there is an additional monthly payment, your loan will have to be approved using your new debt and if the payments are too high you could lose your approval.
Even if you didn’t take out a new credit account and you were just thinking of buying another car but didn’t, if you applied for an auto loan there will be a new credit inquiry showing up on your credit report. If you can’t document the event and show there in fact is no new credit, it can hold up or even stop the loan process altogether.
USDA loans require an appraisal when buying a home. The lender will request information on three recent home sales in the area similar to yours. Lenders will use the lower of the sales price or appraised value. If your sales contract says $275,000 but the appraisal says $270,000, you will need to come in with the difference.
At this stage, you have some choices to make but if you can’t renegotiate the sales price to reflect the low appraisal and you can’t or won’t come in with the additional $5,000, the loan will be turned down due to the low appraisal. This can happen in areas where property values are declining or in an area where there are more than a few recent foreclosures.
Lenders can’t anticipate every event and once they issue a preapproval they’re confident the loan will close. And you should be too as long as your lender is experienced with USDA loans. But when things go terribly wrong after a USDA loan has been preapproved, it’s because things are different now than they were then. Can they be corrected and the loan continue? Sure, some of the events can. But just know that your loan documentation is reviewed both at the initial application and when your loan papers are ready to be ordered.