When you are ready to purchase a home, your credit plays a vital role in the type of loan you will be offered. There are many loans available on the market today, but one of the most affordable and easiest to qualify for are the USDA loans. The USDA credit score requirements are among the most relaxed guidelines available on any loans today. Even though the requirements are lax, it does not mean that you can have extremely bad credit and still get the loan. The lender that provides the loan has the final say in whether or not you get a loan – if the lender is not willing to lend to you, the package will never make it to the USDA’s office for their approval, which will make it impossible for you to ever get a USDA loan.
What is your Credit History?
Your credit history is like a timeline of your past financial purchases and how you paid them. It will show the number of on time and late payments that you have made over the last few years. Some credit lines drop off after a few years, but derogatory credit typically remains on the report for many years. Late payments are categorized as 30-days, 60-days, 90-days, or 120-days late. Anything more than 30-days late is typically a serious hit on your credit report and will not allow you to get a loan, if it has occurred within the last 12 months. This is even true for USDA loans. Other items that your credit history will show include any liens on your property, collections, bankruptcies and foreclosures, each of which greatly decrease your credit score and make it difficult for you to get any type of loan.
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How the USDA Looks at Credit
The good news is that the USDA does not focus on your actual credit score; rather they look at your history. Even if you have a blemished history, but have shown responsibility since that occasion and have made up for the errors in your past, you can often qualify for a USDA loan. The USDA credit score requirements are among the most relaxed among the industry. In general, they want to know that you are going to pay your loans now and well into the future – they do not worry about the past. Typically if you have a spotty credit history, the occasions need be at least one year ago – if there were any lates during the last 12 months, it will be harder to qualify though.
A Minimum Credit Score
Some lenders will require that you have a credit score of at least 640 in order to qualify for a USDA loan. This is more for their purpose than that of the USDA. Because the lender is the one providing the loan, they have the final say in what gets approved and what does not. Typically credit scores lower than 640 signify a much higher risk of default based on the history of loans. This does not mean that if you hit a bad spot in your life and ruined your credit that you are considered a high risk, but you might have a harder time finding a lender that is willing to supply you with the loan. The best thing to do is work on repairing your credit before applying for the USDA loan. This is why it is important to know your credit history before you apply for a loan; if your history is bad, you will have the opportunity to make things right before any lenders pull your credit and deny you for a loan.
How to Repair your Credit
If you are trying to bounce back from bad credit, there are several things you can do to meet the USDA credit score requirements. Start by making all of your payments on time. This will help your score increase with this one simple change. In addition, take inventory of all of your outstanding credit – if the amount of credit you have used exceeds 30% of your credit limit, it is greatly hurting your credit score. Take this time to reduce your outstanding credit by paying accounts down or off as soon as you can. The lower your outstanding credit, the higher your credit score will get and the easier it will be to get a loan.
The USDA credit score requirements are among the easiest to qualify for, yet finding a lender that will accept lower credit scores could prove to be difficult. If you have less than average credit, it is best to work on improving it before applying for any type of loan, including the USDA loan; this will provide you with the greatest chance at getting approved for a loan that is very beneficial for many borrowers.