USDA loans are among the most lenient loan programs available today. That being said, they do have credit requirements you must follow. As far as a minimum credit score, they are lenient. They prefer scores higher than 620, but that is in a perfect world. They will accept scores as low as 580 and sometimes even lower. The lower your credit score, though, the more the lender must scrutinize your file. A borrower with a credit score over 620 may breeze through the application and underwriting process, while one with bad credit will take longer and have to provide more documents.
Many loan programs’ focus is the housing history. It makes sense, since you wish to take out a new mortgage. A new lender wants to see your payment pattern for any other mortgages you held. Again, your credit score plays a role here. If you fall in the “under 620” category, you should not have any late payments in the last 12 months for your housing history. The combination of the low score and late housing payments are too much of a risk for a USDA loan. If you never owned a home before, be prepared to provide your lender with a 12-month rental history. This history must come from your landlord and show the date of your payments, the amount, and whether they were on time or not.
On the other hand, if you are in the “above 620” category, you do not have to have a perfect 12-month housing history. You may have one late housing payment and still get approved. The lender will ask for an explanation and will need to determine it is not an ongoing pattern. Maybe you lost your job or you fell ill temporarily. These explanations can make a lender understand your late payment. If they can see your upswing after the late payment, that usually suffices as well. If you are in this category, you also do not have to provide a rental history if this is your first home. Your above 620 credit score is enough for the lender to see that you make timely payments for the most part.
Under any circumstances, however, if you have a late housing payment within the last 12 months, the USDA requires lenders to look back over the last 3 years. They focus on your housing payments to determine if you have any other late payments within that time. The maximum allowed is one more late payment outside of the previous 12 months. If you have more than this, you may not qualify for a USDA loan.
Other Account Histories
Your housing history is not the only thing lenders look at for a USDA loan. Your other account histories matter as well. If you have bad credit, chances are it is because you did not make your payments on time. The USDA needs lenders to determine how many late payments you have. Generally, one late payment on an account other than a mortgage is acceptable. Anything more than one may render you ineligible for the USDA program. This is why you should focus on your payment history, rather than the score. The USDA takes low credit scores, but has little tolerance for a pattern of late payments.
Negative Economic Events
The USDA is also concerned with any bankruptcies, foreclosures, or collections reporting on your credit report. Again, this is outside of your credit score. Lenders look for bankruptcies or foreclosures within the last 3 years. They do not say you cannot have a BK or foreclosure, but they do require at least 3 years after the date of discharge or sale before you can apply for a USDA loan. This allows you enough time to get back on your feet and make the right financial decisions. Because your credit score might not increase within that time, the USDA looks at the history as discussed above. This is why your housing history, whether mortgage or rental, is so important. The more late payments you have within one year, the less likely you are to secure USDA financing.
The USDA also requires you to take care of any collections reporting on your credit report. You can do this in one of two ways:
- Pay the collections off before you close on the USDA loan
- Apply for a payment arrangement with the creditor – if you already have one, you must show timely payments
Finding USDA Loans with Bad Credit
It may sound like lenders will be really tough on you if you have bad credit, but there are exceptions to the rule. USDA lenders look at borrowers as humans with a history. They try to understand what went on before making any rash decisions. A bad credit score does not automatically preclude you from the program. Instead, you must show not only that you overcame the issue, but that it was not a chronic issue that caused serious financial destruction.
Finding USDA loans with bad credit means you may need to shop around a little more. Each lender has their own requirements. You may find one that will accept your 580 credit score and late credit card payment and another that will not. This is why you should shop around and talk to different lenders. At the very least, you get to see the available interest rates and fees out there. If you stick with one lender, you never know what another lender may have offered you. Stay diligent and find a lender willing to accept your risk level and take advantage of the many benefits of the USDA loan.