What Are the Credit Requirements for a USDA Loan?

USDA bad credit rules.

Credit report graphicIn accordance with USDA regulations, lenders are obligated to examine an applicant's credit history and decide whether or not that borrower has the willingness and capacity to meet his or her loan commitments.

Applicants are disqualified from receiving a USDA home loan if they meet any of the following criteria:

  • The borrower is currently delinquent on a non-tax Federal debt.
  • The borrower is currently delinquent on court-ordered child support, unless the applicant has a court-approved repayment arrangement with three on-time payments made prior to settlement; any past due payments are made in full prior to loan settlement; or the borrower has a documented release of liability.

Minimum Credit Score

A credit score of 640 or above is required for a lender to use artificial intelligence to underwrite the loan. For loans with credit scores less than 640, the loan is underwritten (examined) by an underwriter before being approved. The underwriter is the person who decides whether or not to accept or reject a loan application.

Charge Off Accounts

A charge-off is an obligation for which the creditor is unlikely to make good on its commitment. If the statute of limitations for collecting the debt has not yet expired, creditors may transfer the debt to a collection agency or seek a judgment against the applicant in order to collect the amount.
Bad credit has a negative impact on one's credit score.

Underwriters for USDA-approved lenders are required to examine all charge-off accounts and determine whether or not the borrower(s) is/are a suitable credit risk before continuing with the transaction. The USDA does not demand that charge-off debts be completely paid off.

Collection Accounts

A collection is a past-due debt that has been sold or assigned to a collection agency as a result of the borrower's failure to make timely payments. The credit score reflects the fact that you have bad credit.

Regardless of the underwriting recommendation made by the Guaranteed Underwriting System, the authorized lender's underwriter is obliged to review all collection accounts and determine whether or not the applicant(s) is a suitable credit risk before approving the loan. According to the USDA, there is no requirement that medical collections be paid.

You will be able to choose from the options listed below.

If a payment arrangement(s) is not already in place, it must be accompanied by creditor documents and include the monthly payment. Alternatively, an existing repayment agreement may be used.

Immediately prior to loan settlement, payment in full of all outstanding accounts;

Providing that 5 percent of the outstanding balance is accounted for in the monthly liability amount, no additional paperwork is necessary.

All currently active collections must be included on the AI application page as well as the loan application.

Delinquent Court Ordered Child Support

An applicant, who is past due on child support that is court ordered, is disqualified for a guaranteed loan unless:

  • The applicant has a made three on time payments made prior to loan closing due to an approved repayment agreement.
  • Any past due amount must be paid in full prior to loan settlement, or there is a documented release of liability.

Delinquent Federal Non-Tax Debt

Other than Federal income taxes, a non-tax Federal debt is a debt obligation due to the U.S. Federal Government.

Federal debts are usually discovered when the lender reviews the applicant's public records or credit report.

A borrower(s) with an overdue non-tax Federal debt is ineligible for USDA funding until the delinquent debt is fully paid off or a documented release of liability.

Federal Taxes

Federal tax formm graphicTaxpayers are deemed delinquent by the IRS who owe Federal taxes and do not pay in full by the filing date.

Repayment Plans:
An applicant with past due Federal tax debt is ineligible for a USDA loan unless an approved repayment agreement is in place prior to settlement; and a minimum of three on time payments must have been made. The applicant may not make a lump sum payment equal three monthly payments to meet this requirement.

Non-Federal Judgment

Following a lawsuit, a judgment is a formal decision made by a court. The judgment is an enforceable court order that can result in the collection of the delinquent debt by various means.

The Court ordered judgments are required to be fully paid off or provide proof of three timely payments were made in accordance with an agreement with the creditor.

The monthly payment (if applicable) should be included in the debt ratio.

If applicable, the judgments of a non-purchasing spouse in a community property state must meet the paid in full or meet the previous requirements.

Foreclosure Or Repossession (36 months)

House with a foreclosure signA property foreclosure is the legal process through which a lender acquires title to a property, evicts the owner (if required), then sells the property to settle the mortgage obligation.

Repossessions occur when the borrower refuses or is unable to pay the lender for the collateral secured by the loan. The lender may be able to recoup its losses by selling the collateral. There is a possibility that a deficit balance may persist. Credit actions taken against the application will be noted in the applicant's credit score and credit history.

A discharged foreclosure or a repossession reported 36 months prior to the loan application date is not considered unfavorable credit by the USDA.

Short Sale (36 months)

House with a short sale signThe term short sale is when a lender allows a homeowner to sell their home for less than the mortgage balance. All proceeds from the sale are passed to the lender.

The lender will either obtain a deficiency judgment against the owner and require repayment of all or part of the remaining balance, or simply forgive any remaining balance.

The short sale is reflected in the borrower's public record and credit score.

A short sale closed 36 months to the date of loan application is not adverse credit prior.



In conclusion, to be eligible for a USDA loan, borrowers must have a credit score of at least 640. The credit requirements vary depending on the type of USDA loan you apply for, so it is important to speak with a lender to find out exactly what you need to qualify. If you meet the credit requirements and can afford the monthly mortgage payments, a USDA loan could be a great option for you.