What are the USDA Credit Requirements and Guidelines for Rural Home Loans?
Contrary to popular belief, USDA guidelines contain certain credit requirements that must be satisfied in order to qualify for a loan. An applicant is expected to have sufficient credit history that demonstrates a track record of meeting debt payment obligations according to their repayment schedule. It is thus important for a USDA loan borrower to have a credit profile that reflects a willingness and ability to repay dues on time.
Before a conditional commitment is issued, an USDA lender has to pull a tri-merge (Equifax, Transunion and Experian) credit report. The report must not be older than 90 days at the time of issuing the USDA mortgage commitment letter. If the borrower has one or more of the adverse credit blemishes stipulated above, the lender must adjoin any supporting documentation that indicates the temporary nature of the circumstance that caused the hiccup. Reasonable reasons that are supported by relevant paperwork usually get approved.
If you owe the federal government any money or have defaulted on any federal debt without entering into a payment arrangement, then you can be certain that you’ll not be eligible for a USDA loan under the Rural Development Division’s credit requirements. All USDA lenders will run the applicants info through Credit Alert Verification Reporting System (CAIVRs) as they need to submit it along with the loan submission package.
USDA credit underwriting criteria allows for streamlined process for new home purchases.
Credit Score >= 620
The lenders can process loans using the streamline guidelines provided by USDA for borrowers with a satisfactory credit history with a credit score higher equal to or greater than 620.
If an USDA lender underwrites a USDA loan using the streamline requirements, a number of otherwise mandatory steps can be skipped. These convenient steps for loan processing allows the lender to approve borrowers for USDA rural development loans in a fast and convenient manner.
Any credit blemishes that resulted in adverse credit history need not be documented except if the delinquent debt concerns a federal or a previous USDA loan. The lender also can skip over the requirement of obtaining a rental payment history from the applicant’s landlord. Additionally, the borrower need not provide supplementary documentation for explaining the past adverse credit accounts such as unpaid collection amounts, delinquent debt, missed payments etc. Unlike the strict credit qualifying criteria for borrowers with lesser credit score, outstanding debts need not be paid off prior to closing in order to be eligible for financing under USDA lending guidelines.
When analyzing the credit scores of the loan applicants, the lender needs to pay more attention to the primary wage earner of the household. Other applicants’ scores also need to be reviewed and considered as a part of the evaluation of the USDA financing application. If all the three scores are available, then the middle score must be used in eligibility analysis, or the least score in case of only two scores.
These flexible USDA approval guidelines for credit for borrowers with scores greater than 619 is of great advantage to borrowers looking to close their loans in a faster time without any holdups due to adverse credit documentation.
Credit Score from 580 to 619
Applicants who fall in the score range of 580 – 619 have historically been a risky group with a significant chance of default during their loan terms. In order to avoid facing a delinquent loan down the line, a USDA lender evaluates borrowers in this range for the likelihood of default and other risk factors. USDA strictly stipulates that the lenders do not extend debt ratio waivers or exemption from rental or housing payment history verification. In specific cases where the borrower can demonstrate satisfactory mitigating factors, then the lender is required to document the specific nature of the circumstance. An acceptable approval exemption may be extended if the nature of the incident that caused the adverse remark was temporary and beyond the control of the borrower. It is also important to show that the cause of the credit blemish has been cured and is highly to reoccur in the future.
Credit Score below 580
Borrowers with credit score below 580 are traditionally shunned by conventional residential financing entities due to their high risk of default. This is specifically the case in the case of USDA rural housing programs. USDA clearly instructs their approved lenders to avoid financing borrowers with such low scores, especially when they have one or more of the following in their recent credit history:
- Any 30-day late payment on any debt in the preceding 12 months
- A foreclosure, short sale or default on residential mortgage in the past 36 months
- A chapter-7 or chapter-13 bankruptcy in the past three years
- Any outstanding judgements that were added to the credit report in the last one year
- Outstanding debts, collection accounts, tax liens or federal debts that are delinquent without any sort of payment arrangement to cure them
- Delinquent accounts that have gone to collection in the prior 12 months
Borrowers with sub-prime level credit scores should take steps to improve their credit profile if they have any one of the above mentioned issues. Unless the borrower can show extraordinary factors, the chance of getting approved due to credit waiver is next to nothing.
No Credit Score (Unconventional credit)
If an applicant doesn’t have any credit history, thus no credit score, the lender may approve a USDA loan by considering non-traditional credit lines. In order to consider such a request, it is important that any additional layers of risk are not present in the borrower’s credit history profile.
For approving applicants with no credit score, an USDA lender needs to compile and document at least four unconventional sources that can be:
- Rental or housing payment history
- Monthly payments to utilities such as electricity, water,gas or cable
- Any documentable insurance payments
- Regular payments made to a retail store
If you have read all the above mentioned USDA credit guidelines, you can be assured of what can be expected of you by a USDA lender regarding your credit score, history and debts during the loan approval process.