Let’s go ahead and get these two misconceptions out of the way right up-front. Contrary to belief, first time home buyers are not required to have 20% down payment and 700-800 credit scores. USDA loans are a wonderful home loan product that is quite the solution. Actually, USDA will not even approve a buyer that has enough bank accounts for 20% down! It provides the ability to buy a home with no down payment, flexible underwriting guidelines, and affordable monthly payments. In this article we are going to focus on the USDA loan credit requirements so more buyers realize how attainable home ownership can be.
USDA Loans in a Nutshell
USDA Rural Development Guaranteed home loans provide first time home buyers and subsequent home buyers with the ability to purchase a home with no money down and a fixed rate. Although there are USDA income limits and property eligibility requirements, buyers find that most are eligible. Below are the standard limits, but there are exceptions to exceed these levels and some county limits are higher.
USDA Household income limits for most counties
1-4 household members $82,700 5+ household members $109,150
Additionally, eligible properties include stick built homes, town homes, off frame modular, and approved condos in USDA eligible areas. Most of America, other than highly populated areas, is eligible.
How to Search for USDA Eligible Areas
Plus, USDA is not just for low priced homes in the country. Actually, buying a home up to 453,100 is possible based on 2018 loan limits. Plus, many mid-sized towns are eligible. Even many whole counties are USDA eligible. If a city is not eligible, then spread out the home search to consider USDA eligible properties.
USDA Affordable Payments
The primary focus of USDA home loans is to provide affordable financing to buyers. USDA accomplishes this with the following features…
- 30 year fixed rate – only option
- Low 1%, financed USDA funding fee – lowest among government loans
- Cheap mortgage insurance
USDA Loan Credit Requirements – Minimum Credit Score
Every home loan has its own requirements. Some strict, while others are flexible. USDA loans certainly fall into the area of a flexible option. As we mentioned earlier, our USDA loan is very forgiving when it comes to credit scores. Our program allows as low as a 620 mortgage credit score. That’s pretty aggressive for a no money down purchase!
When it comes to lower credit scores, most think of FHA loans. FHA is a wonderful program and often it is the best choice. But, eligible buyers who compare USDA vs FHA will find similar credit score requirements yet USDA winning in the down payment and monthly payment categories. It doesn’t make sense, but it is true that even though FHA buyers put down 3.5% of the price in down payment, the USDA total monthly payment is lower almost every time.
Notice, we mentioned 620 “mortgage credit score”. First, make sure to know the difference between free credit scores vs mortgage credit scores. Typically, a 620 credit score means using the middle of 3 credit scores pulled by the lender. Although, it is possible through the USDA loan credit requirements to have only 2 scores. Even possible for loan approval with only one score.
Buying a Home With One Credit Score
That’s right! No money down purchase with one credit score is possible! Keep in mind that USDA loan credit requirements are not based solely on credit scores. Additionally, whether there is one, two, or three credit scores, there must be sufficient established credit. This is very important for buyers with only one credit score. Luckily, a buyer only needs a few tradelines seasoned 12 months to qualify.
USDA Limited Credit Success Story
A first time home buyer had one loan reporting on his credit report. The creditor only reports to Equifax credit bureau, so this resulted in only one credit score. Although, there was not any bad credit on the report. By itself, this is not enough credit to qualify. But, the buyer also had on-time rent history plus on-time car insurance and utility payments which we verified. Therefore, proving good credit references was enough for USDA loan approval and closing on a new home with no money down!
Do keep in mind that if the reason for one score is because of significant derogatory credit, normally that will not work for USDA loan approval. But, remember that USDA is lenient. So, it is common for buyers to close with open minor medical collections or previous late payments.
USDA Loan Credit Requirements Allow Alternative Credit
Notice in the success story that only one item reported on credit. Traditionally, rent and insurance do not report to the credit bureaus. In cases of limited references reporting on a buyer’s credit report, it may be possible to use alternative credit. Alternative credit means using nontraditional credit to prove credit worthiness. Normally, these nontraditional references do not report on credit. Yet, they are usually able to prove ability to pay bills on-time in cases with limited credit.
Reasons to Use Alternative Credit References
- Limited number of accounts reporting on credit a minimum of 12 months
- Manual underwriting approval (used when an automated approval is not received)
- Authorized user accounts make up a majority of credit
- Prove there is more to the picture than limited credit
Examples of Alternative Credit to Use
- Rent history (although some report to credit bureaus)
- Insurances (life, health, auto, boat, disability) – not payroll deducted
- Cell phone
- Xbox live, Apple
- Small store accounts – furniture, gas station, heating oil companies
- Buy here pay here car loans
- Consistent savings pattern – depositing a set amount over a 12 month period
In cases where credit is limited, but everything else looks in line, proving extra alternative credit references can put a borrower over the top when it comes to USDA loan approval.
USDA Loan Credit Requirements – Short Sale, Foreclosure, Bankruptcy
Another way of showing USDA understands that no one is perfect, there are opportunities to buy a home with no money down after a foreclosure, short sale, or bankruptcy after just a few years. Generally, USDA loans are looking for 3 years to elapse since these events plus re-established, on-time credit history.
In extenuating circumstances, it is possible to qualify for a USDA loan with less than 3 years after an event. USDA specifically mentions that divorce, job transfer, or relocation is not extenuating. Although, in case of divorce if the prior loan was current at time of divorce and then the ex-spouse had a short sale or foreclosure, an exception may be granted.
How Do I Check My USDA Eligibility?
Hopefully, this has at least driven home the point that buyers can be far from perfect in order to meet USDA eligibility. With flexible guidelines such as credit scores, debt to income ratios, income limits, property eligibility, and affordability, USDA loans provide one of the easiest ways for a home buyer to purchase a home.