USDA loans are an often overlooked loan that could benefit many borrowers. Thinking that this loan is strictly for rural (meaning way out in the countryside homes) is not the only use for them. The USDA has set boundaries for USDA loans that far surpass the expectations of many people. A home that you are considering may fall within those boundaries and you may never know unless you ask. These loans offer many benefits to borrowers including 100% financing; the ability to roll the mortgage insurance fees into the loan; and easy qualification guidelines. The largest stipulation of these loans is the need to have income that is low enough to qualify as this program was started to provide those people that would not qualify for any other loan type to become homeowners.
USDA Rural Development Loan Credit Score Requirements
Aside from the income requirements, many people wonder what the minimum credit scores are for the USDA loans. Since this is a government program, there is a minimum score of 580 required. Many lenders will not accept scores that low, however. The 580 threshold is set by the USDA and is the lowest score they will allow in order to back the loan. In addition, the USDA has set forth certain categories regarding your credit scores. The type of financing and concessions you receive is dependent on your credit score.
- If your score is between 581 and 619, you are a risky borrower. These are the borrowers that will not be able to obtain a USDA loan from many approved lenders as they will be unwilling to take the risk. The lender that does take the risk will be required to carefully evaluate your loan application and supporting documents. Everything that makes up your loan profile will need to be very specific and accurate. The lender will look for any issues that could pose a problem and they will not allow for any debt ratio waivers, which makes an exception for a higher than normal debt ratio. In addition, housing history must be present for borrowers in this category. This means that you must be able to provide evidence of timely housing payments, whether as a mortgage or rent payment. If you are a first-time homebuyer and were living with family/friends and not paying rent, you will not be eligible for a USDA loan at this time.
- If your credit score is over 620, you are in a better category. The USDA considers any score over 620 good and allows for streamlined processing of the loan. This means your loan documents will undergo less scrutiny as will your credit report. The lender will go over your credit report and question any issues that he sees, but they will not likely render it impossible to get a USDA loan. Some lenders will require proof that the delinquencies or collections were taken care of, but most will not since the credit score has bounced back, which tells the lender that you have become more financially responsible since that issue occurred. As an added benefit for having a credit score over 620, there is no need for a housing history. This is great news for borrowers that were not renting or paying a mortgage but were rather living with friends/family rent free. They can still become first-time homebuyers based on their other credit.
Something that USDA loans focus on more than your credit score is the history itself as it speaks volumes in terms of your financial responsibility. The USDA looks for things like how many late payments you have had in the last year. If there is more than one 30-day late during that time, you will not be eligible for the loan. They also look at derogatory credit situations, such as bankruptcies, foreclosures, and short sales. Each of these situations must be at least 3 years behind you in order to qualify. In addition to late payments, your housing history is looked upon separately. The USDA will go back over the last 3 years’ worth of payments to see how timely you made those payments. If there are more than two instances of late payments, you are ineligible. Last, but not least, all collections must be paid off and discharged in order to get the USDA loan and no judgements of any type are allowed.
Exceptions to the Standard USDA Credit Eligibility Guidelines
As with any loan, there are exceptions to the rule. Since the USDA operates to provide those with lower incomes with the ability to purchase a home, they offer exceptions for people that have had unfortunate circumstances. These circumstances must be something that you were not able to control by any means and were a one-time occurrence. Examples of what the USDA would provide exceptions for include serious illnesses, the loss of a job due to a company closing or downsizing, or a sudden injury that rendered you incapable of working. The USDA and your lender will carefully go over the data that supports your claims and determine if your late payments and/or collections were in fact a result of that unfortunate time in your life. Of course, if you have been able to pick up the pieces and improve your credit score since then, the numbers and history will speak for itself.
If you were to evaluate all of the loans available to you, such as the FHA loans, conventional loans, and USDA loans, the most affordable and least restrictive is the USDA loans. FHA loans require lower debt ratios and higher levels of income and conventional loans would never consider an applicant with a credit score lower than 620, but even a score that low is questionable for conventional financing. If your income falls within the ranges allowed for your county by the USDA, which can be found on their website, and you have a decent credit history but not a very high score, you could be eligible to purchase a property within the USDA boundaries, which comprises a large portion of the United States, giving you many options.