USDA loans are one of the best type of mortgage homebuyers can get.
They offer 100% financing (no down payment), and a super low 0.35% mortgage insurance rate.
To qualify for a USDA mortgageyou need to meet the minimum requirements for credit, income, and property location.
In this article we’ll look into all the USDA loan requirements in 2018.
Rate Search: Check Today’s USDA Mortgage Rates
What areUSDA Loans?
The US Department of Agriculture created the USDA guaranteed loan program to improve the economy and quality of livein rural America.
The USDA does not offer the home loans directly, but guarantees the loan, reducing the risk to lenders. They come with 100% financing. And they have the lowest mortgage insurance premiums (MIP) of any mortgage.
Low-to-median income homebuyers in rural parts of the county may be eligible.
USDA Loan Requirements
- Household income cannot exceed 115% of the area median income view USDA income limits here
- Minimum 620 credit score
- Owner occupied borrowers only, no investors
- 2 years of steady employment
- Property must be in a USDA eligible rural area view
- Maximum 50% debt-to-income ratio
- Working farms are not eligible
USDA Loan Credit Requirements
The credit score needed for a USDA loan will depend on the lender you work with. Typically, most lenders require a 640-680 credit score, however, there are lenders that can issue USDA loans with a minimum 620 FICO score.
Lenders Look at Your Entire Credit History
Lenders look at more than just your FICO score. They take your entire credit history into consideration. This means things such as payment history, collection accounts, and the amount of debt you carry can have a big impact on whether you qualify.
Negative Credit Items that Affect Approval
- More thanone 30 day late payment in past 12 months
- One or more mortgage late payment in last 12 months
- Significant number of collection accounts
- Significant amount of collection debt
- High credit utilization ratio (the amount of available credit being used)
- Accounts recently opened
How the Minimum USDA Credit Score Compares to Other Loans
To qualify for the USDA home mortgage program, you will need a 620 FICO score, some lenders require much higher scores. But, how does the minimum credit requirements compare to other popular types of mortgage loans?
- FHA Loans – 500 credit score with 10% down payment / 580 credit score with 3.5% down payment
- VA Loans – Minimum 580-620 credit score
- 203k Loans – Minimum 640 credit score
- Conventional Loans – 620 score
If you do not meet the credit requirements for the USDA loan program, you may qualify for an FHA loan.
How Credit Scores are Calculated
There are several factors that come into play when calculating your credit score. Let’s look at the five factors FICO, the credit scoring model used by lenders, uses to calculate scores.
- Payment history has the biggest impact on your credit rating, accounting for 35% of your overall score.
- Credit utilization ratio is the amount of credit you‘re using. This is the ratio of your credit card balances compared to your credit limits, credit utilization accounts for 30%.
- The length of time your accounts have been open makes up 15% of your score
- Mix of credit accounts makes up 10%, this means you should have a mix of different accounts, such as credit cards, auto loans, mortgage loans.
- New credit recently open accounts and credit inquiries. When you apply for credit, the lender will pull a copy of your credit report which negatively affects your score.
Improve Your Credit Before Applying
Your credit rating will determine whether you qualify for a mortgage. It also plays a huge role in determining your interest rate and closing costs.
The lower credit score a borrower has, the higher risk they present to the mortgage company. Higher risk means mortgage lenders have to charge a higher rate and more fees to help offset the risk. Before you apply for a USDA mortgage, work on increasing your credit score as much as possible.
Pay Down Your Credit Card Debt
Your credit utilization ratio the ratio of credit you’re using.
Example: If you have a credit card with a $10,000 credit limit, and you have a $6,000 balance, your credit utilization ratio is 60%, which is high.
Try to aim for a utilizationratio of 20% or lower. This will ensure your credit rating is as high as it can be before you apply for the home loan.
The Bottom Line..
USDA home loans are a great program designed to development rural parts of the country. With no down payment and a low mortgage insurance rate, these loans are the best options for homebuyers that meet the requirements.
Lenders have a high credit score requirement because 100% financing can be risky.However, some lenders have low credit requirements for USDA rural development loans, allowing borrowers with a 620 FICO score to qualify.
Do you have a 620 credit score and want to see if you qualify for a USDA loan?