How I Got a USDA Direct Loan

[Drian]

I am writing this post for those who were like me: dreaming of being a homeowner, but with limited or poor credit and unsure of how to get approved for a home.

On November 28, 2016, I closed on a $210,000 loan for a house that I never could have afforded without the wonderful subsidies and assistance available for lower income borrowers that is only available in the USDA Direct Loan program.

There are two different types of USDA loans.  Direct, and Guaranteed.  The Direct program is the mortgage of choice for lower income borrowers because it offers payment subsidies and can extend your mortgage out to 33 years (in my case) or up to 38 years in certain cases.  The Guaranteed loan appears to offer only 30-year payment terms and does not offer the payment subidies.  What that means is that you would likely be approved for a much nicer home with Direct versus Guaranteed with a payment that you can afford.

Both programs are Zero-Down-Payment programs, but they both do requiree that you buy a home in a rural area.  This may block you from living in the city of choice, but there are many rural areas that butt right up to cities.

I had serveral credit blemishes from prior credit problems, so at the start of this process my credit score was very low.  I understand that the Direct program does not have a credit score requirement per se, but if your middle score is under 640 they will deny you credit if you have unpaid repos, charge-offs, or collection accounts.  If your middle score (meaning two of your three scores) are 640 or above, then you will get an automatic approval, even if you do have unpaid blemishes on your file.

The first step I took was to research all I could find about the Direct Loan.  I also knew I had to boost my Mortgage FICO scores up to the magic 640 number, so I began to take control of my open trade lines, paying down balances and being careful not to apply for any new credit.  Paying off old, closed, bad credit items will NOT boost your credit score, so the best way to boost a bad score is to get open accounts in good standing to report low balances.

I then joined myFICO and chose the product that allowed me access to all 3 bureaus with the bonus of alerts to let me know what was going on with my credit.  Evey three months you can pull another updaged credit report, so even though it costs $30 a month for this service, I highly recommend it for those who are re-building credit and need to wait to apply after their two best scores peak over that 640 threashold.  Timing in your loan application is crucial because you WILL be denied if you have credit issues and apply too early before your credit scores reach 640!

In July 2016, my credit score was getting close to the crucial number, so I requested an application from my local USDA office and began to fill out the pre-app.

I submitted my pre-app in early August just as soon as I pulled an updated tri-merge report and saw that 2 out of 3 mortgage FICO scores were over 640.

It just so happens that the USDA office only pulls one of the three buraus for pre-applications, and it just so happened that they pulled the one score that was under 640, so I got a letter in the mail requesting that I call them.  Had I not known my credit scores and had not been researching this process, my dreams to be a homeowner would have been shattered right then and there.  Based on that one score and the blemishes on my credit file, they said on the telephone call that I did NOT appear to meet the qualifications for the program.  This is important because it might happen to you, too!  Do not give up if you know all three scores!  I had to request that they submit the full applicaiton to me anyway, and by their own rules they have to.  I did this becasue I knew that I indeed DID qualify for the loan with the other 2 scores.

The full applicaiton costs money.  I think I paid $25 or something close to that number for the credit pulls.  They do a hard inquiry of all three bureaus.  As I knew, I DID qualify and I DID receive a letter in the mail stating that I did qualify for the program, however, they were out of money at that time and I was placed on a wating list.  In my case, I only had to wait until the end of August (about two to three weeks) before I received my Certificate of Eligibility in the mail!

That Certificate is what allows you to go house shopping and to put a contract down on a house.  I was thrilled because I was approved for the maximim loan amount for my area, which was $222,000!  I only make just under $36,000 a year at my job, so that amount was way beyond what I had even hoped for!

I did not have a car payment and most of my charge accounts had either been paid off or paid way down by the time I applied, so these factors all boosted my approval amount.  Also, only I applied even though I have a spouse.  In most states only one spouse can apply, even though they also need certain details about the non-applying spouse.  This can boost your chances of getting approved if only one spouse works or if the spouse with the lower or non-existing income also has bad credit.

So within two weeks after getting our Certicate of Eligibility, we had found our Dream House!  Now this too is important.  If you are approved for an amount that seems like it's too high for what you think you can afford, do NOT narrow yourself in to cheaper houses.  You will end up with a subsidized house payment based on your income and I have read that many people do not qualify for a subsidy only because they put a contract down on a cheap house.  You will end up with a house payment that is MUCH lower than what you think it is going to be, so do not panic!  Do NOT cheat yourself out of a nicer home if you are in the Direct program.  Get the house you love that is within the price range you are approved to shop for!

I also saw a huge sum of money on the estimate that made it seem like i was going to have to bring thousands of dollars to the closing table.  Do not let this scare you!  In my case I negotiated for the seller to pay $3,000 of my closoing costs and I ended up walking away with a small check!  I had to bring nothing extra at all to closing, so be smart about this, too.

Now there are going to be some costs that you will have to come up with, so please be prepared for these ahead of time.  I was not and had to have several garage sales to raise the money we needed to cover some of our expenses.

You will need to pay your earnest deposit.  In our case it was $500.  I have heard that some sellers require $1,000 or more, so you must find a way to come up with Earnest money up front in order to get under contract.

You will have to pay for a home inspection.  We paid $375.  We then had to have the home re-inspected because the seller was required to fix things.  Our inspector did not do re-inspections, so we had to pay another $100 for a re-inspection through a different inspector.  Take a page from my experience and ask up front if your inspector does re-inspections!  Do not chose one that does not do them becuase you will likely have to have the home re-inspected!  Also bear in mind that all safety issues or problems that could cause structural issues with the home WILL have to be fixed or else have bids in place befofre your loan will close!  Our seller did not fix all items, so we have to get them fixed within 6 months of loan closing.

So we already had to come up with $975 just to get to loan closing.

Now this is the big item and the most expensive one: you also have to pay for a full year of home-owner's insurance UP FRONT in order to close on your loan!  That insurance does not have to be paid until the day of closing and you cannot get rate quotes until you are under contract.  We had to also come up with just over $1,500 for home owner's insurance.

So our total money in was about $2,500 and we did NOT get back from our closing check nearly what we put in.  You will need to keep this in mind because although this is a Zero-Down program, it is not truly a zero-cost program.  My advice is to start saving months and months in advance as you are in the prepraraiton stage trying to get your credit score boosted up.  If you get a refund from your Federal taxes each year, perhaps saving most or all of it will help you get the money you you need to close, but be careful because if it looks like you have a huge savings account to qualify for a regular mortgage that does require a down payment, you will also be denied this program and asked to go with a different morgage product.

The biggest issue with USDA is that they are SLOW and it will take at least a couple of months or so from contract to closing.  But everyone who has gotten this loan will testify that it is very much worth the wait and the hoops you will neeed to jump through!

My house is an atrium split and the gross living space is 1,800 square feet.  When you add in the basement and the garage space, my house is almost 2,700 square feet!  (They cap loans in most areas to 2,000 gross living space square feet, but garages and basements do NOT count.)  I came from a house that was old and about 900 square feet.  My rent payment was almost the same as my new hous payment for a really nice house!  My mortgage payment would have been less than my old rent payment had taxes here been cheaper.

I am thrilled with my home and wanted to give you all the advice I could think of based on my own situaiton so that you too can one day be a home owner.  Do not let go of your dream and keep plugging along.  It is SO worth it!

[Anonymous]

Congratulations! 🎉🎉🎉 Do you mind sharing what your; interest rate is and what the  mortgage payment ended up being? How much reserves did you have in the bank when you turned in your statements? Finally,if you can give a list of what items the required you to provide, such as, how many bank statements, check stubs, tax info, etc. 

[elim]

Good post, Thanks.    How many years do they look back to qualify? What happens if you make 100k/year 2 years from now?

[mauirain]

First of all Congratulations!

Thank you so much for sharing your experience with us.

I have a question...

In an earlier post you mentioned that the initial credit report pull was good for 120 days.

You were worried that they would pull another before closing. Did they ever do that? Or, was the initial pull all they ever used?

Also, where can I find the handbook you mentioned?

Thank you so much

[Anonymous]

Rd.usda.gov has both handbooks.

Congrats OP and yes it is a very good program if you qualify for either Direct or Guaranteed. We did guaranteed and are very happy. Our seller paid closing costs and prepaids so we didn't even have to pay insurance upfront. We paid Ernest money, appraisal and home inspection for a total of 1350 but got 697.00 back at closing.

[Drian]

I don't have the exact interst rate in front of me, but I think it is about 2.9 percent or something similar, and it's fixed, of course.  Our payment with subsidy, taxes, and insurance is just under $1050 a month, but taxes are what are hurting us in the county we bought in.  Our house payment would have been a lot less in a different county with a lower tax amount.  

Our subsidy is about $200 and it will be recalculated annually.  It could change year by year based on household size and household income.  When our daughter grows up and goes to college, for example, our houshold size will change and that will affect our subsidy.  That is also true if my wife has a change in employment and starts earning more money or if I get another job promotion.  In those scenarios we would potentially no longer qualify for a subsidy at all.  Our payment may also fluctuate annually based on increases in taxes and insurance, even if our subsidy amount stays the same.

We did not have much money in the bank when we applied.  I think it was only a couple hundred dollars, but we had sold a used car the moth before applying and used the money from the sale to pay off credit cards (which in turn also helped to boost my credit score over the threshold).  We did have to write a letter of explanation about the larger-than-normal deposit from the car sale because that information does matter (they want to make sure you don't have any undisclosed sources of household income or sources of undisclosed recurring income that would disqualify you for the program.  They also want to make sure that you do not have a huge cusion of money that you could use as a downpayment with traditional financing.).

We had to give them two paycheck stubs and two months of bank statements.  My wife runs a home-hased business and currently does not earn much money at it.  She had to provide documentation about her income and also write a letter of explanation about her projected income over the next year or so.  We did also have to provide updated paycheck stubs at the orientation meeting, but that may have been becuase I got a job promotion and small pay raise after we had recevied our Certificate of Eligibility.  I think they had to make sure we still qualified for the program.  We also had to furnish copies of our most recent Federal Income Tax return, but no other major pieces of information were requested.

They give you a checklist of everything you need to provide, and as long as you have access to normal financial documents, gathering that information up only takes a short amount of time.  My wife got everything gathered up and organized for them within an hour.

If you have had issues with being overdrawn at the bank, I would recommend making sure you have that under control before applying.  I would certainly never apply with statements showing negative balances or a balance that is really low.  You should show at least some money left over each pay period to prove that you can afford to be a homeowner.  (i.e. pay for unexpected emergencies like a plumber, etc.).

[Drian]

If you have a 640 or higher middle FICO mortgage score, then they do not look back at all.  Your FICO score qualfiies you for the loan at that point, regardless of what is on your credit reports from the past 7 years.

If you do not have a high enough credit score (middle means that two of the three scores have to be 640 or higher to qualify automatically), then you cannot have any UNPAID collections, charge-offs, or repos on your credit reports at all.  No new derogatory items can have been added within the last year (even if it was paid off since it was added) and there must be a gap of at least 6 months since you paid off any other outstanding negative items.

If your credit score is below 640 and you have a "clean" credit report without any baddies, then your credit score does not matter at all and you should still be approved for the program, but you will have to jump through extra hoops and have extra verifications done, including verification with your landlord, etc..

Remember that the only credit score that matters is the FICO Mortagage score!  And I am posting on this site because this is where I got access to that important score to get my house!  We have lots of different credit scores, even lots of different FICO score versions, but other credit score are irrevant.  The only one that they will pull is the FICO mortgage score from each of the bureaus.

I chose to get my FICO Mortgage credit score boosted to 640 because I did not want the added stress of having to do extra verifications or worry about any past credit blemishes.  Shooting for the higher credit scrore is the best option if you can acheive it, but it does take work, several months of careful use of existing credit, and diligence to boost your score.  If you don't have enough open, current, and postive trade lines right now, then you may not be able to get a 640 score no matter how hard you try.  I was blessed with several open lines of credit reporting monthly and helping to boost my score as I used those lines of credit carefully and responsibly, inclusing paying them down or off.

And they never said what happens if I suddenly make $100,000 a year in the future!  I know for sure that I would no longer need a subsidy if that were to happen!  But I can only assume that one of two scenarioes would happen: 1.) They would ask me to refinance with traditional credit, which I would be able to afford to do at that time.  or 2.)  I would simply be expected to make the full payment that would be due without a subsidy.  Frankly, I wouldn't stress on that scenario at all.  I would love to have a huge pay increase in my household, but I have now closed on a home loan with a locked in payment based on current household income and the "what ifs" of life are irrelevant at this time.  None of us can predict how much we are really going to make next year, and they don't seem to expect us to know that in order to qualify for this loan, either.

[Drian]

The handbook is available on the USDA web site.  (I think it's usda.gov)?  Do a search for the Direct Loan.  I think you can also do a Google search for "USDA Direct Loan handbook" and find it that way.  Bear in mind that there are two handbooks.  One handbook for the Guaranteed loan, and one handbook for the Direct Loan.  There ARE some policy differences between the programs.  For example, I also have student loans and under the guaranteed program, how they cound my payments differs from how they are counted with the Direct program.  So it is very important to read the correct handbook so you know what is going to happen and how certain scenarios will apply to you!

I also only ended up having one tri-merge credit pull.  They pulled one bureau twice (I can't recall if it is was Experian or Equifax) because they do just one bureau hard pull for the pre-applicaiton and then all three bureau hard pulls for the full application.  My closing date had to be pushed back at the seller's request, so I was cutting it close and was almost to the 120 days, but thankfully the loan did close beforehand and they did not do another credit pull.  If you decide to do a construction loan, then you will probably have at least one more credid pull, so remember to keep your credit score high and not to do anything that could cause you to suddenly lose your qualification for the program.

[Anonymous]

Very good post and congrats.  Enjoy it.

[Princess9483]

Congrats on your new home and thank you so much for writing this post! I too want a Usda loan but my low disabled income and my car payment is keeping me away obtaining one . Hopefully next year, fingers crossed! I actually did not know the difference between Direct and Guaranteed.

My question is.... are they sticklers for ratios or is it a case by case thing? Like I said before, I'm disabled, lower incomed but decent credit score, TU 647, my fiancé on the other hand doesn't make much but definitely more than myself and his credit is awful, too low to even mention. Of course I rather wait a year and pay off the car early than to wait another 2 or 3 years after he files for bankruptcy and hope and pray that his scores reach 640. Even though your wife doesn't make much did they calculate her income to determine your subsidy and/or ratios as well?