Your credit history plays a vital role in whether or not you get approved for a USDA loan. While it is true that USDA loans have low credit score requirements, the history reported on your credit report is what plays the most important role. The lender for your USDA loan will start by pulling your credit and looking at the actual score. The score is what helps the lender determine your level of financial responsibility. Generally, a credit score below 580 will not be eligible for a USDA loan. Borrowers with credit scores between 581 and 619 are considered high risk borrowers but will generally be eligible for a USDA loan; they will undergo quite a bit of scrutiny in regards to their credit and financial history. The borrowers with these lower credit scores will generally not be eligible for any type of waiver on their debt ratio (having a high debt ratio) or any other exceptions unless they have a lot of mitigating factors that can make up for their risky credit score. In addition, if a borrower with a credit score within this range does not have housing history reporting on his credit report or a landlord that can provide rental history, the USDA will generally not extend credit for a loan.
Minimum Credit Score for USDA Loans
On the other hand, if you have a credit score that is over 620, the USDA loan requirements make it possible for you to go through a streamlined sort of process for the USDA loan. Borrowers in this category will undergo less scrutiny when it comes to analyzing their loan application. If you have blemishes on your credit report, you will not have to provide proof that it was taken care of because your credit score does the talking for you. In addition, borrowers in this category do not need to provide a housing history, which means that if there is no housing history they could still be eligible for the USDA loan. The only exception to the rule for this category is any type of federal debt that is outstanding and in a collection status; care must be taken to get a payment arrangement to get it paid.
There are a few basic things that the USDA looks for when determining if your credit is worthy of a USDA loan. They tend to focus more on the history itself rather than the score as long as you meet the minimum requirements. The things they look for include:
- The number of late payments. Typically only 1 late payment of 30 days is allowed for the last 12 months in order to be eligible
- More than 3 years must have passed since any bankruptcy or foreclosure discharges
- There cannot be any judgements within the last year
- You cannot have more than 2 late rent or mortgage payments in the last 36 months
- All collections must be taken care of or at the very least, have a payment arrangement
- There cannot be any government debts, whether federal or state level
- No new collections within the last 12 months
The only time the USDA would make an exception to these rules is if circumstances that were not within your control occurred. This could mean that you suddenly became ill or you suffered an injury that made it impossible to work. Even if you were working, if medical bills made it impossible to get your bills paid on time and resulted in collections and poor credit, an exception may be able to be made. You will have to provide plenty of proof that the situation is behind you and that you have made strides to move forward and show financial responsibility. The only debt that an exception cannot be granted is any type of federal debt – at the very least you need a payment arrangement created to get the debt paid down.