USDA loans are typically easy to qualify for, but they do have certain credit requirements you must meet in order to get approved for this program. If you meet the credit requirements along with the income and debt ratio qualifications and you purchase a home within the USDA boundaries, this financing method can be a great way to purchase a home.
The Credit Score
The USDA credit requirements state that a score cannot be below 580 in order to qualify for a loan in this program. In addition, if your credit score is above 580, but below 620, your loan will be under more scrutiny than it would if it was over 620. In general, this means you will have to provide a 12-month housing history with no late payments during that time. The housing history can be a mortgage history or rent payment history, as long as it comes from a landlord in written form. In addition, you will not be eligible for any waivers for not meeting the qualifications, such as a higher debt ratio or a credit blemish that needs approval.
If your credit score is above 620, your loan process with the USDA will be quick and easy. You will not need to provide a rental history if you did not own a home previously and you can get exceptions for any past issues as long as they were not a chronic problem. In addition, if you require an exception for a debt ratio that is higher than the standard 29/41 USDA requirement, most lenders will be able to grant the exception with the higher credit score.
The specific thing the lender looks for when going over your credit report is the amount of late payments you have, no matter your score. Generally, they will look at the last 12 months for your standard payments. If you were late paying any of your debts more than once during that time, you are ineligible for a USDA loan. In addition, if you have a late housing payment in the last 12 months, the lender must look back over the last 3 years of your housing history. If you have more than 2 late payments during that period, you are ineligible for a USDA loan.
Bankruptcies and Foreclosures
Along with late payments, the lender needs to determine if you went through a bankruptcy, foreclosure, or have any collections reporting. If you have a BK or a foreclosure reporting, you must wait 3 years from the date of discharge in order to obtain a USDA loan. If you have collections, you must show how you will pay them either by paying them off completely before you close on the loan or arranging a payment agreement with the entity holding the collection. If you have any federal debts, however, the USDA will not overlook it or grant any exceptions. If you have tax liens or an arranged plan with the IRS, you must be in good standing with it and be able to pay off any liens in order to qualify for the USDA loan.
Exceptions to the Rule
The USDA does provide exceptions to the rule as long as your credit score is high enough to warrant exceptions. In order to be granted special permission, however, you will have to have adequate reason for the late payments or issues on your credit report and prove that they were a one-time issue that will not occur gain. As long as you have adequate evidence, such as proof of a sudden injury or illness that caused your inability to pay your bills on time, an exception may be granted.
In general, the USDA credit requirements are simple and easy to meet. As long as you make your payments on time and do not have a large amount of outstanding collections, many people find it easy to qualify for this type of loan.