Understanding USDA Loan Credit Requirements

This article is a overview of the credit requirements for a USDA loan.

Credit report graphic The U.S. Department of Agriculture (USDA) offers a variety of home loan programs to help low- or moderate-income individuals finance a home purchase in an eligible rural or suburban area.

The credit requirements for the USDA loan program are not as strict as other government-backed mortgage loans, but there are still some guidelines that home buyers must meet. In general, borrowers should have a good credit history with no late payments in the last 12 months. They may also need to provide proof of income and employment.

The USDA offers two home purchase programs, the Single Family Housing Guaranteed Loan Program

and the USDA Direct Loan. Both mortgages are subject to income limits and area requirements.

What Credit Score Do I Need for a USDA Loan?

You might be surprised to learn that the USDA home loan programs do not have an established credit score requirement to qualify for a USDA loan

The USDA Guaranteed Loan

The Single Family Housing Guaranteed Loan Program is provided by USDA approved lenders. The USDA allows lenders to supersede the basic USDA credit requirements. Consequently, most lenders prefer a credit score of at least 640. This allows lenders to submit the loan application through the Guaranteed Underwriting System (GUS). The Guaranteed Underwriting System analyzes the loan application, including the applicant's income and credit report. The automated underwriting system speeds up the mortgage process.

Credit scores less than 640 require manual underwriting. Manual underwriting is the traditional method of determining whether the loan application should be approved. The debt to income ratio falls to 29%/41%. The PITI (principal, interest, taxes, insurance, and PMI) and total debt ratios of an applicant may be higher than 29 percent and 41 percent, respectively, if the lender finds that significant compensatory circumstances indicate that the household has stronger repayment capacities.

With a credit score of 680 or greater, the debt to income ratio is expanded to 32%/44%. This means that the monthly mortgage payment is allowed to be 32% of the monthly gross income. The mortgage payment (including property taxes, homeowners insurance and the USDA's version of PMI) and monthly credit obligations can go to 44% of the applicant's gross monthly income.

Minimum Credit Score for a USDA Loan

Believe it or not, there is no required credit score for either the Direct or Guaranteed home loans.

However, the credit score impacts the debt to income ratio. Lenders and the USDA use the debt to income ratio to determine the maximum mortgage amount. There are two calculations with DTI, the payment calculation and the monthly debt calculation. To determine the maximum mortgage payment, just divide the proposed mortgage payment by the gross monthly income.

The debt ratio is calculated by dividing the monthly debt obligations (i.e., auto payment, minimum credit card payment, etc.); the debt ratio also includes the proposed mortgage payment. After you add up the monthly obligations, divide the total by the gross monthly income.

Your debt to income ratio determines how much you can borrow.

USDA Direct Loan

The USDA Direct Loan is offered to creditworthy applicants who desire to purchase a home, but just do not make enough money to purchase a home with a conventional loan, FHA loans or VA loan. A credit score of 640 or higher moves the mortgage application through the system quickly. If the credit score is less than 640, the mortgage is manually underwritten.

This Direct loan program is also known as the Section 502 Direct Loan Program. The Direct loan helps applicants with low and very low incomes obtain housing that is decent, safe, and sanitary in rural areas that are eligible for the program. It does this by providing payment assistance to applicants, which increases their ability to repay the loan. A form of subsidy known as payment assistance lowers a borrower's monthly mortgage payment for a limited period of time. The amount of assistance is based on the family's income after adjustments have been made. The payment assistance is a discounted interest rate and a loan term of 33 years, however, a 38-year term is available for applicants with very low incomes who are unable to afford the 33-year loan term.

Unlike the Guarantee Loan, the mortgage application is made to one of the USDA rural development offices, directly.

Indicators of Unacceptable Credit for a Direct Mortgage

Those who do not meet these requirements may still be able to get a USDA loan if they can provide alternative documentation of their creditworthiness. However, for most people, meeting the minimum credit requirements is essential in order to get approved for this type of loan.

A court-affirmed obligation or court-created or judgment brought on by nonpayment that is currently past due or has been outstanding in the past twelve months, except

A bankruptcy in which:
A judgment paid off more than twelve months prior to the date of application.
Debts were discharged more than 36 months prior to the date of application; or where an applicant successfully completed a bankruptcy debt restructuring plan and has demonstrated a willingness to meet obligations when due for the 12 months prior to the date of application.

A home foreclosure that has been finalized within the past 36 months.

USDA agency obligations that were debt settled within the past 36 months, or are being considered for debt settlement.

An outstanding Internal Revenue Service (IRS) tax lien or any other outstanding tax liens with no satisfactory arrangement for payment.

Federal debt delinquency

Minimal or no credit history. The absence of a credit history on the credit report may be mitigated if the loan applicant can document a desire to pay continuing debt obligations through other satisfactory means, such as third party verifications or canceled checks. Because of impartiality issues, third party verifications from relatives of household members are not allowed.

Non-Agency debt obligations that were written off within the past 36 months, unless the debt was fully paid off at least 12 months ago.

Outstanding collection accounts with a track record of erratic payments with no satisfactory arrangements for repayment, or collection accounts that were fully paid off within the last 6 months, unless the applicant had been making ongoing payments previously.

Payments on any installment account where the amount of the delinquency exceeded one installment for more than 30 days within the last 12 months.

Payments on any revolving account which was delinquent for more than 30 days on two or more occasions within the last 12 months.

Two or more rent or mortgage payments paid 30 or more days late within the last 2 years. If the applicant has experienced no other credit problems in the past 2 years, only 1 year of rent history will be evaluated. This requirement may be waived if the program loan will reduce shelter costs significantly and contribute to improved repayment ability.

It is possible for Rural Development to come to the conclusion that the applicant was not responsible for the circumstances that led to the bad credit, and that they have since rectified the situation or made plans to do so. Keep in mind that each individual who applies will be judged based on their personal qualities. An applicant who has a good credit history cannot make up for the poor credit history of a co-applicant in this situation. The review of the applicant's credit history helps establish whether the applicant is both able and willing to repay obligations.

Other Obligations That Are Not Considered When Calculating Debt-to-Income Ratios

Obligations not considered or included in total debt-to-income ratio calculations

of loans secured by 401(k) funds;

Automatic deductions to savings accounts, mutual funds, stocks, bonds,

Child care;

Collateralized loans secured by depository accounts;

Commuting costs;

Federal Insurance Contribution Act (FICA) contributions;

Federal, state, and local taxes, unless a payment plan is in place;

Insurance, other than property insurance;

Medical collections;

Medical payments;

Open accounts with zero balances;

Other retirement contributions such as 401(k) accounts, including the repayment

Union dues;

Utilities;

Voluntary deductions.

How to exclude monthly debt to raise your debt to income ratio

Credit history graphic Found on page 11-2 of the USDA CHAPTER 11: RATIO ANALYSIS, you can find the following statement:

“If ten or less months of repayment remains per the credit report, creditor

verification, etc., the monthly debt may be excluded if the payment does not

exceed five percent of the monthly repayment income.”

“Installment debt may be paid down to ten months or less of remaining debt”

If you can pay down the installment dent to 9 payments, the monthly debt may not be included in your debt ratio.

FAQs About USDA Credit Requirements

Q. Can I get a USDA loan with a 600 credit score?

A. Yes, you can get a USDA loan with a 600 credit score. However, the interest rate may be higher than if you had a higher credit score.

Q. What are the credit requirements for a USDA loan?

A. The credit requirements for a USDA loan are determined by the lender. However, most lenders require a credit score of at least 640, and some may require a score of 680 or higher.

Q. What Affects Your Credit Scores?

A. Things like the amount of debt you have. The types of accounts you have, how old your accounts are, their status (whether they're paid off), and even the type of address you've used for your Social Security number can affect your credit score. How long you've had a credit history is another factor.

Q. What is a Credit Utilization Rate?

A. Credit utilization is the ratio of how much credit you are using to how much credit you have available. It is shown as a percentage: your available credit limit divided by your total credit limit. Say your limit is $1,000 and your current balance is $600. As a share of your credit line, your credit card balance is $600 divided $1,000, or 60%.

Conclusion

In conclusion, a USDA loan is a great option for those who are looking to purchase a home and want to take advantage of the lower interest rates and mortgage insurance rates that the USDA offers. However, it is important to remember that in order to be eligible for a USDA loan, the applicant must meet certain credit requirements.

SOURCE: Credit Analysis Single Family Housing Guaranteed Loan Program