USDA loans work well for people that don’t mind living in a rural area. The USDA designates certain areas of the US that are outside of the city lines as rural. If you can find a home in that area, you can secure 100% financing for your home. That means no down payment. You can even have the seller pay your closing costs, meaning you can come to closing with very little of your own money.
It all sounds too good to be true, so what’s the catch? You must need a high credit score to get the loan, right?
Wrong! You don’t need a high credit score – all you need is a 640 FICO score according to the USDA. If you compare that to the 680 credit score you need along with a 5% down payment for a conventional loan, you are getting a good deal.
What if You Don’t Have a 640 Credit Score?
The USDA loan is for low to middle-income borrowers, some of which don’t have a 640 credit score. Does this mean they have to go without USDA financing?
Luckily, the answer is no, but only if you don’t have traditional credit. If you don’t have enough trade lines to make up a credit score, USDA lenders are allowed to use ‘alternative credit.’ They can use trade lines that don’t normally report to the credit bureau. For example, if you pay car insurance, rent, or utilities, you have bills you must pay each month. If you can provide proof that you’ve paid three to four alternative trade lines on time for the last year, you may be able to secure USDA financing.
A 660 Credit Score can Get You Better Treatment
If you have a 660 credit score or higher, you may be able to streamline the USDA loan approval process with your lender. Borrowers that have a credit score of at least 660 may not have to provide as many documents to get through the approval process.
Having a higher credit score may also help to offset a high debt ratio. Normally, USDA lenders have to decline borrowers that have a 640 credit score and debt ratios that exceed 29/41. Even though many loan programs allow a total debt ratio of up to 43%, the USDA sticks to their 41% guideline unless you have that higher credit score.
Are you Eligible for a USDA Loan?
Before you even start worrying about whether a USDA lender will approve you for a loan, you should determine if you are eligible for the program itself. The USDA program is only for low to middle-income borrowers. You can determine if you qualify by using the income chart here.
When you use this chart, make sure to take into consideration your household income, not just the income of you and your co-borrower. The USDA wants to know the total household income to see if you qualify for their guaranteed loan program or if you may qualify for an FHA or conventional loan, both of which you may need to put money down on the home to get.
The USDA program is great for borrowers with at least a 640 credit score and debt ratios in line with the program’s guidelines. It offers 100% financing and low closing costs to help stimulate the rural areas of the country that otherwise might sit vacant.