USDA loans are one of the cheapest types of home loans, they offer 100% financing (no down payment) and have a lower mortgage insurance rate than other mortgage loans.
In this article, we’ll take an in-depth look at the credit requirements for USDA Loans.
USDA Mortgage Rates (Novermber 2020)
30-year fixed-rate mortgage
15-year fixed-rate mortgage
5/1 adjustable-rate mortgage
What are USDA Loans?
The US Department of Agriculture created the USDA loan program to improve the economy and quality of life in 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 whose income does not exceed 115% of the area median income may be eligible.
USDA Loan Requirements
2020 USDA Loan Requirements
• 640 minimum credit score
• Total household income less than 115% of the average in your area
• Maximum 43%-50% debt-to-income ratio
• Two years of stable employment history
• Occupy the property as your primary residence
• Prove of income (Two years of tax returns and W2's)
• Must be in an eligible rural area
• Work with an approved USDA lender
USDA Credit Requirements
The minimum credit score needed for a USDA loan is 640. However, 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.
No Credit History
If you have no credit history then USDA lenders will ask for alternative credit lines, such as rent and phone payments to establish positive payment history.
Bankruptcy will not disqualify you from a USDA loan. There is a 24 month waiting period after a chapter 7 bankruptcy, 12 months if you have extenuating circumstances. Borrowers must re-establish positive payment history post bankruptcy.
A single late payment will not automatic disqualify you, however, you should not have anymore than one late payment on any of your accounts in the past 12 months
There is a 36 month waiting period after you have filed for a bankruptcy. Some borrowers may qualify in 12 months with extenuating circumstances.
Collections, Judgements, and Federal Debt
Lenders may verify that judgments and Federal debt have been paid or on am agreed upon payment plan. Collections will not disqualify you, if your total collection debt is over $2,000 your lender may require you to make payment arrangements prior to closing.
Negative Credit Items that Affect Approval
USDA Credit Requirements
• Minimum 620 credit score
• No more than one 30-day late payment on any account in the past 12 months
•No late mortgage payments in the past six months
• 24 month waiting period after a bankruptcy or foreclosure
• Collections, judgements, and federal debt must be paid or on a payment plan
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?
Minimum Credit Score
580 credit score with 3.5% down
HomeReady / Home Possible Loan
FHA 203k Rehab Loan
Conventional 97 Loan
If you do not meet the credit requirements for the USDA loan program, you may qualify for an FHA loan.
Improve Your Credit Before Applying
Since your credit score is the main factor in determining your mortgage rate it’s highly recommended you work on improving your credit score before applying for a mortgage.
The lower the 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.
Steps to Improve your Credit Score
Pay down credit card debt
Your credit utilization ratio is the amount of available credit you're using; it accounts for 30% of your overall FICO score. Try to pay your balances to less than 10-15% of the card's limit.
Don't apply for credit
Do not apply for new lines of credit or loans. Too many credit inquiries can lower your credit score. You're also adding debt to your report, which can negatively affect your score.
Pay your bills on time
Your payment history accounts for 35% of your overall score. Don't miss a payment on any bills, set up auto-pay to ensure you don't miss any payments.
Dispute Innaccurate Items
You can dispute accounts you don't believe are accurate with the credit bureaus directly. They will investigate the account and must either verify it or delete it within 30 days.
Get added as an authorized user
If you know someone who has a credit card in good standing with no negative account activity ask them to add you to their account as an authorized user. The entire account history will be added to your credit profile which can increase your credit score.
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.
How Your Credit Score is Calculated
Your payment history is the single biggest factor in determining your credit rating. This includes late payments and collection accounts. Making your payments on time is the best way to a good credit score.
The amount of available credit you're using compared to your credit limit is called your credit utilization ratio. It accounts for 30% of your overall score. The lower your card balances, the higher your credit score will be. Try to keep your credit utilization ratio below 25%.
Length of Credit
How long your credit accounts have been opened accounts for 15% of your score. The longer your accounts stay open, the better your score will be. This is why it is wise to keep your credit accounts open.
Types of Credit
10% of your score is based on having multiple types of credit accounts open, such as credit cards, auto loans, mortgages, etc. It's best for your score to have a good mix of credit and loan accounts.
Credit Inquiries & New Accounts
Whenever you apply for a loan, there is a new inquiry into your credit history. These inquiries count against your score for up to 12 months. Opening a new account will also lower your credit score initially.
USDA home loans are a great program designed to develop rural parts of the country. With no down payment and a low mortgage insurance rate, these loans are the best options for home buyers that meet the requirements.
Lenders have a high credit score requirement because financing 100% of a property is 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?