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5 Steps to Finding the Right USDA Lender

Choosing a USDA Lender: What to Know Before You Apply

The USDA loan program was established to boost homeownership for Americans who want to purchase in qualified rural or suburban areas. This generous program comes with no down payment requirements, competitive interest rates, and no private mortgage insurance requirements.

While the USDA makes provisions for how its home loan program works, it's up to USDA-approved lenders to decide who qualifies for financing. If you're thinking about applying, it's important to find an experienced USDA lender. Read on to learn more about what to expect and how to choose the right source of financing.

Qualifying for a USDA Loan

First, it’s a good idea to understand the qualification rules. To be eligible for a USDA home loan today, expect to meet the following criteria:

  • To qualify for a USDA home loan today, you’ll need to meet the following criteria:
    • Each year, the USDA publishes guidelines for eligibility based on earnings, and your household income cannot exceed 115% of the median income for your area. As of 2024, you're likely eligible if your annual income is less than $112,450 for a household of one to four people or less than $148,450 for a household of five to eight people. Put another way, your household income cannot exceed 115% of the median income for your area. You can learn more about income limits near you from the USDA.
    • The home must be in a USDA-eligible rural or suburban area.
    • You must occupy the home as your primary residence.
    • Your loan-to-value (LTV) ratio can be as high as 100%, which means no down payment is required. However, if you’re applying with a weaker credit profile, bringing some cash to the table and reducing your LTV ratio will improve your odds of loan approval.
    • Aim for a debt-to-income (DTI) ratio of 43% or lower. “USDA-approved lenders may allow some flexibility here with compensating factors like having a good, secure job history, having reasonable savings, and having a lower LTV ratio,” explains Dennis Shirshikov, a professor of economics and finance at City University of New York/Queens College.
    • Have a minimum credit score of 640 or higher.

Lender Credit Score Flexibility

The government doesn’t require a minimum credit score for a USDA loan, but many lenders want a credit score of 640 or higher.

“A score of 640 or more is ideal if you want to get approved through the automated underwriting system, but you may qualify with a lower score via manual underwriting, although this typically requires additional documentation,” explains Steven Glick, director of mortgage sales for HomeAbroad.

The good news is that many lenders will still approve USDA loan borrowers who have lower scores if they can show a low DTI ratio, sufficient savings, and stable employment.

How Lenders Handle Credit Scores Differently

Many USDA lenders follow more flexible credit score requirements than others. In rare circumstances, some are actually willing to accept scores as low as 580.

“USDA lenders handle credit scores differently because the USDA doesn’t require a minimum score for its guaranteed loan program,” continues Glick. “Many lenders stick to a 640 minimum score for efficiency and lower risk. But some with a higher risk tolerance accept scores in the high 500s with manual underwriting – which involves reviewing your full financial history, like income stability and debt levels, instead of relying on automation.”

Lenders willing to allow lower scores often accept alternative credit histories. You’ll need three non-traditional credit references over the past 12 months. These can include rent payments, utility bills, phone or cable bills, and insurance premiums. Each must be verified through credit reports or direct statements.

“Some lenders are flexible and accept rent plus one utility bill as sufficient proof, while others are stricter, requiring all three references or giving preference to traditional credit sources like loans,” Glick says.

J. Keith Baker, a Banking and Finance professor at Dallas College, notes that lenders with more experience or expertise in working with USDA loans may be more willing to accept applicants with non-traditional credit histories or lower scores.

“Other lenders might have internal risk management policies that lead them to be more flexible or rigid in their credit score requirements, even though they follow USDA guidelines,” Baker adds.

Lenders may also offer credit counseling programs, tools, or other resources to assist borrowers in improving their scores before applying for a USDA loan.

Tips for Borrowers With Lower Credit Scores

If your credit score is low, here are some ways to improve your odds of loan approval:

  • Shop around carefully and compare loan offers from several different lenders, as requirements and flexibility will vary.
  • Ask lenders about their specific credit score requirements upfront to bypass unnecessary hard credit checks that could impact your credit score.
  • Try to pay down your credit card balances to below 30% of the credit limit.
  • Avoid applying for new credit accounts during the preapproval process.
  • Make your bill payments on time.
  • Check your three free credit reports and dispute any errors or inaccuracies you spot.

How to Compare Top USDA Lenders

USDA mortgages differ from other types of loans, While that doesn't always mean extra red tape, it can result in a significant learning curve if your loan officer has never worked with a USDA buyer before.

How can you find the best USDA lenders? The experts recommend these proven strategies:

  • Ask friends, relatives, mortgage brokers, and local real estate agents for recommendations.
  • Search online for USDA-approved lenders.
  • Shop around for at least three to five lenders. “Many local banks and credit unions partner with the USDA to offer these loans. It can be helpful to contact them directly or visit their websites to see if they offer USDA financing,” suggests Baker.
  • Request preapproval quotes that indicate the rate, fees, and credit requirements.
  • Carefully compare the rate, fees, and credit requirements for each loan offer side-by-side.
  • Contact a loan officer with each lender to gauge responsiveness and USDA expertise. “More important than anything else on a USDA loan is finding a loan officer you can trust who is proficient in USDA guidelines and has experience closing USDA loans,” recommends Matt Schwartz, founding partner of VA Loan Network and a lending professional with Southlake Mortgage, which offers USDA loans.
  • Choose the lender with the best terms, rates, fees, service, and reputation.

Ask Important Questions

To help narrow down your lender list and ultimately pick the right financing source and loan officer, count on asking several key questions:

  1. How much of your business comes from USDA loans?
  2. What is your volume of USDA loans in the past year?
  3. What is your approval rate for USDA loans?
  4. How does the USDA loan process work, step-by-step?
  5. What’s the preapproval process like?
  6. What’s the minimum credit score allowed, and can you work with mine?
  7. What kind of debt-to-income ratio do I need, and what happens if my scores or DTI fall short?
  8. Are your loan officers required to complete special training regarding USDA loans?
  9. Are your loan officers familiar with the needs of USDA homebuyers?
  10. Are you familiar with manual underwriting for USDA applicants?
  11. What is the average time for your USDA loan process from application to closing?
  12. Do you have an in-house underwriter or loan processor who will work with me through the entire process?
  13. Will I work with the same loan officer from start to finish, and will they work closely with my real estate agent?
  14. What are the total fees you charge, including the USDA-guaranteed upfront fee?
  15. How do your rates compare to other lenders?
  16. What are some common reasons USDA loans get denied, and how can I avoid them?
  17. Do you provide any homebuyer education?

Keep in mind that the best USDA lenders have experience with this specialized loan product. These lenders and loan officers who know the ins and outs and can help you get the most from the USDA loan program.

Staff education is also crucial since USDA lenders that provide specialized USDA loan training are more likely to understand the ins and outs of the loan process. This means fewer bumps along your road to homeownership.

Gauge Customer Service and Satisfaction

Quality of customer service can make or break your home loan experience. Reading online reviews can give you a sense of the actual experience of working with a particular lender. Pay attention to how they treat customers in addition to their track record.

“To best determine a lender’s customer service and satisfaction levels, check online reviews from Google, Trustpilot, and the Better Business Bureau. Look especially closely at reviews from borrowers who mention USDA loans by name,” advises Shirshikov. “Then, call the lender and inquire about average response times, the reachability of loan officers, and whether they offer a single point of contact for the duration of the loan.”

Learn What’s Involved with the Loan Process

Be sure to ask your lender how their USDA loan process works. Some USDA lenders are set up like a conveyor belt, passing borrowers from person to person at each stage of the loan process. Others use a dedicated team structure.

USDA-approved lenders with dedicated teams can help provide a better quality customer experience. You'll get to know your loan officer throughout the homebuying process. Other companies might sacrifice personal connections for the sake of efficiency.

Depending on your priorities and personal preferences, each setup has its benefits and drawbacks.

Compare Rates

Before starting the home buying process, it's a good idea to get a general sense of current market interest rates. That being said, don't get too attached to the rates you see online.

The interest rate you ultimately lock in for your USDA loan will depend on your credit score, DTI ratio, and other factors. On top of that, rates can change daily or even hourly as economic markets fluctuate.

A good USDA lender can help you determine the best time to lock in your interest rate, but you'll have to be under contract for a home first.

The Bottom Line

Finding and selecting the right USDA-approved lender for your needs will require a bit of homework. But by doing your due diligence and shopping around, you can make a well-informed decision and benefit from this generous no-money-down loan program.