USDA home loans are great options for rural first-time home buyers. In the previous two steps, we covered the key advantages of a USDA loan, as well as the income limits borrowers will need to understand. There are certain requirements associated with this loan program backed by the United States Department of Agriculture. 

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We recommend you check out the first two articles in this series for additional information:

Step 1: What is a USDA Home Loan?
Step 2: USDA Loan Income Limits

What Credit Score is Required for a USDA Loan?

Many first-time buyers are a little worried about their credit score and how it will impact their ability to qualify for a mortgage loan. All lenders will look at the borrower’s credit score, in addition to several other key financial indicators. These include, but are not limited to, income, debt-to-income (DTI) ratio, employment history, savings and other debts. 

The minimum credit score set by most USDA-qualified lenders will be 620. If you have a 620 FICO score or higher, you are off to a good start when applying for a USDA loan. Again, this is not the only thing the lender and USDA will look at when underwriting and approving the loan. You could have a fantastic credit score, but be in bad shape in other areas. Or, you could be in great shape with all the rest of your finances, but have a low credit score for whatever reason.

How Are Credit Scores Established?

Generally, credit scores are established through payment of recurring bills and other expenses like rent, insurance, utilities, school tuition or childcare. There are cases where someone may have a low credit score because they simply haven’t established much credit. Racking up a bunch of credit card debt will hurt your DTI, but it can actually be beneficial to your credit rating if you are making your minimum monthly payments. Meanwhile, someone with no credit cards, car loans, rent, school tuition or significant consumer credit history may actually have a weaker FICO score. 

This is exactly why lenders and loan underwriters will look at all the factors to determine if home buyer qualifies for a mortgage loan. For those with a less-established credit history, the lender may also be able to approve the USDA loan without a non-traditional credit report. There may be other third-party verifications that can be utilized to prove you are a worthy borrowing candidate.

Extenuating Circumstances

With USDA loans, however, a minimum score of 620 is a pretty solid benchmark. They do have guidelines in place that will allow for borrowers with lower scores to qualify. Borrowers may be eligible if they have experienced a specific “extenuating circumstance.” Examples include:

  • Job layoff due to workforce reduction
  • Medical emergency
  • Other events beyond the applicant’s control

The extenuating circumstance must be a one-time event and it shouldn’t be an event that is likely to occur again. It also cannot be a result of the applicant’s inability to manage his or her finances. 

Extenuating circumstances “beyond the applicant’s control” is where there is some gray area because it’s a little harder to define. If you are unsure of your situation and whether or not it may allow you to qualify for a USDA loan, it is best to talk to USDA-certified lender. 

Benefits of Having a Healthy Credit Score

The higher your credit score, the better off you will be when applying for any loan—especially a USDA home loan. Borrowers with credit ratings of 640 or higher will benefit from a more streamlined approval process and have a better chance of qualifying. Better scores and qualification standards also usually translate to lower interest rates on the loan, as well. 

Waiting Periods for Foreclosure or Bankruptcy

USDA loans are primarily aimed at first-time home buyers. If you’ve owned property in the past, you may still be able to qualify. You just cannot currently own or occupy a house and these loans cannot be used for second homes or investment property purchases. If you have gone through a bankruptcy or foreclosure, you will be subject to a waiting period before you are eligible for a USDA loan:

  • Foreclosure: 3 years
  • Chapter 7 bankruptcy: 1 – 3 years, depending on the circumstance
  • Chapter 13 bankruptcy: 12 months after you have completed repayment

To see if you are eligible for a USDA loan and to get started with your application process, contact Moreira Team today!

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