USDA loans are a bit more forgiving as it relates to credit compared to some other mortgage programs in the market. While the USDA itself does not establish a proper credit score, most USDA lenders do and the minimum score typically ranges from 620 to 640. Remember, the USDA loan requires no down payment as well. But even though credit guidelines are a bit relaxed, sometimes the credit score is still too low. There are some things potential borrowers can do to get their credit scores above the minimum requirements and they don’t have to hire some outside credit repair agency. But before we get too much further, let’s first understand how credit scores are calculated and who provides them.
There are three main credit repositories in the country that businesses access, Equifax, Experian and TransUnion. Merchants subscribe to one or all of these services and when a consumer applies for credit, the merchant requests for a credit history. In turn, the merchant also reports payment activity to one or all three of these services. Businesses pay to report as well as to receive credit reports.
Because payment activity can be delivered at different times and to different credit agencies, the credit data will rarely be exactly the same at each of the three repositories. When a USDA lender requests a credit report the lender also requests credit scores with each of the three providing its own credit score. The score will range from 300 to 850 and because reporting times and methods vary from merchant to merchant, the scores will be similar but very rarely exactly the same. For example, the scores for a USDA loan applicant might look something like 670, 645, and 600. The lender will ignore the highest and lowest and use the middle score for underwriting purposes.
Credit scores are calculated using five primary categories, with each contributing a percentage to the score. These categories are:
- Payment History
- Available Credit
- Length of Credit History
- Types of Credit
- Inquiries/New Credit
Payment history contributes the most to the total score, at 35%. When a payment is made more than 30 days past the due date, credit scores will fall. Scores will fall further still for payments made more than 60 and 90 days past the due date. If the account goes into collection, scores continue to drop and if the account is discharged completely, scores plummet. Judgements against the consumers and bankruptcies complete the list.
How much a consumer has available as credit is also evaluated. This contributes 30% to the score and compares the amounts owed to available credit lines. If someone has a credit card limit of $10,000 and a balance of $3,000, the amount owed is 30% of available credit. As the balance rises closer to the limit, scores will begin to falter and if the balance goes over the limit, scores will continue to drop. The ideal balance-to-limit percentage is approximately 30%.
How long someone has had credit accounts for 15% of the score. The longer the credit history, the better the score.
The final two categories each contribute 10% to the score. Having different types of credit help a score such as an automobile and a credit card for example. Other types of credit such as a loan from a finance company can suppress a score.
By concentrating on the two categories carrying the most weight, payment history and available credit, your scores will soon recover. That means making sure future payments are made no later than 30 days past the due dates. If there are existing collection accounts, those need to be addressed as well and recent changes to credit scoring actually improve a score if a collection account is paid off. For collection accounts, start there first while continuing to make timely payments.
At the same time, get existing balances on revolving accounts as close to the 30% mark as possible. Don’t pay everything off and zero out your balances because having a balance actually helps a score whereas paying off a credit card completely or cancelling a credit line can cause scores to fall.
By paying attention to these two categories you’re affecting nearly two-thirds of your total score. It may take a little time, but you’ll soon find your scores return to a healthy state once again.