Requirements for USDA Loans
This is a sensitive subject for a lot people. After the crash of the economy in 2009, we were all left to pick up the pieces. Small businesses went bankrupt, over their head in debt, and many families were forced out of their homes because there was no work and they couldn’t afford to pay their mortgage. CNN Money reported that 2.6 million people lost their jobs which resulted in the credit crisis.
Fast forward 10 years and many of these families have recovered from the downfall, but some may still have some minor things to work on for a loan approval.
USDA Loan Credit Requirements
- 640 credit score, some lenders can go down to 620
- No 30 days late on credit in last 12 months
- No tax liens or delinquent federal debt
- No accounts converted to collections in the past 12 months
- Medical collections are okay with explanation
- Outstanding collections need to be paid if scores are under 640, otherwise collection account action is determined by GUS
Common questions we get asked are; how to get a mortgage without a down payment? Can I get a USDA Loan with a 500 credit score? How to get a USDA loan with bad credit? These are legitimate questions.
USDA understands that individuals are still recovering from the market crash and the Guaranteed Rural Housing Loan Program offers an opportunity for those families to purchase a home despite bad credit, no credit, collections, bankruptcies and foreclosures.
When you complete an application with a USDA Loan specialist, they will pull your credit. Your credit report will provide information on credit scores, tradelines (auto loan, mortgage, bank card ect.), collections, and public records. The credit report is a very useful tool for your Pre-Approval. The loan officer will be able to predict if any red flags will come up during the underwriting process and can address them in advance to avoid any delays in closing.
» More: What is a Credit Score?
Your USDA Loan specialist will pull credit from all 3 bureaus, Experian, Equifax and Transunion. The middle score will be used for loan qualifying purposes. For example, if your scores are 610, 640, 680; then 640 will be the score used for qualifying. If you are applying for a USDA Home Loan with a co-borrower then the lower middle score between the two will be used.
If scores are below 620, it’s ok because you may still qualify for a USDA Guaranteed Loan depending on your situation, and if USDA would allow a credit score waiver. Speak with your loan officer and they should be able to determine if you would qualify for a waiver, or if you need credit repair prior to receiving your Approval.
USDA also rewards those who have improved their credit and are over 680. Higher scores may qualify for higher debt to income ratios. Higher DTI means you will be approved for a higher USDA Loan amount.
What if you have NO credit score? No problem, USDA will work with you even if you don’t have a credit score. Instead they will use alternative tradelines. You will need to prove 12 months paid on time shown on a payment activity history report.
Recommendations for alternative trade lines:
- Rent payment history
- Utility payment history
- Cell phone bill
- Gym membership
USDA requires 2 tradelines, that can be open, closed, or paid in full, but must show at least 12 months repayment history reported on credit report. USDA also requires 2 alternative tradelines if you are including rent payment history, however if you don’t have rent history then USDA will require 3 alternative tradelines.
If you are reading this page and already feel discouraged because you might have really bad credit, don’t let it keep you from trying. Many loan officers will work with you to come up with a game plan to work on your credit and plan for the purchase of your home. Even though it can take a lot of work, sometimes it’s a lot easier than you think.
Here is an example of a USDA borrower with bad credit:
Tonya, a potential home buyer, was extremely discouraged because she checked her credit score on credit karma (link), the scores were so low and she thought that she would never be able to buy a home. Tonya stumbled upon our site and decided to complete an application for a USA Mortgage. The USDA loan specialist pulled her credit and her scores were 580, 610, 620. The loan officer saw that she had 5 credit cards with really high balances, usage at 90%. However everything else on her credit report looked fine. No lates, a couple medical collections, and a utility bill in collections that had been paid in full. He decided to run her credit through a credit simulator and just as he had thought, by making a few minor tweeks, she could be over 640 in 30 days. According to the simulator all she had to do was pay down 2 of her credit cards and her scores would be 615, 640, 645. All she needed was a 640 to purchase a home. He gave her some homework and 60 days later she was closing on her first home!
USDA Income Requirements
The Single Family Housing Guaranteed Loan Program has two main requirements to qualify for the Zero Down Home Loan.
- The property has to be located in a USDA eligible area and
- The gross household income has to be under the income limit for the county you are looking to purchase in.
So what does “under the income limit” mean?
USDA Rural Development Program has income limits set for each County within a State and the program was designed for low to moderate income Americans purchasing in rural areas. The income limits are derived from calculating 115% of the median income for that county and vary based on the number of people in the household. For example, the USDA income limit for a family of 8 is higher than it is for a family of 4.
Don’t worry, you don’t have to figure out the formula to calculate this on your own. The income limits are already laid out for you, all you have to do is click here, go to your corresponding State and you will be taken to a page where you can select your county. Follow the prompts to look up the income limit for your county.
Who all is included in the gross household income calculation?
Generally speaking, all members of the household 18 and older and working are included in the gross median household income calculation. Even if the family members are not on the loan, their income will be counted towards the income limit. However, their income will not be used for the loan. If a spouse is not working, that’s okay, USDA will want a letter from the spouse saying they are not currently working. If an 18 year old dependent is attending college full time and is not working, they also will need to provide a letter stating they are not currently working.
Some deductions that are allowed:
- Child Care Expenses
- Deductions for Dependents
- Disabled Family Members
- Annual Medical Expenses
- Annual Disability Expenses
- Reimbursed Business Expenses
It’s very important to note here that the 115 percent number is not the final arbiter. There are other considerations and deductions from gross household income that must be included when determining maximum allowable income.
- Salaried W2 income
- Self employed or contracted 1099 income
- Tips, Bonus or Commission income
- Overtime income
- Received Housing allowance that will continue
- Income for Farming
- Income to be received in the future but is not documented
- Dependents, 18 years or younger that receive income
- Government Housing Assistance received through section 8
- Live in Nurse or Aid that receives income
Getting married after a USDA Loan?
USDA will not check your gross household income after you close and move into your home. It’s okay if income changes, or increases once you are in your USDA loan. Increase in income will only matter if you are trying to refinance your USDA Loan into another USDA Loan.
Again, when you refinance the current gross household income will be taken into account to qualify for a USDA home loan.
A lot of Americans now have student loans. When purchasing a home you must consider your student loan payment towards your total debts, even if they are deferred and you are not currently making any payments.
Student loans are a hefty loan and are taken into consideration when applying for a USDA mortgage. USDA counts the fixed payment on credit report, or 1% of the outstanding balance at the time of mortgage application . Unfortunately, at this time they don’t use income base repayments or lower payments like; interest only, adjustable rates, deferred or graduate plans. USDA underwriters will request documentation showing proof of loan terms.
USDA Required Documentation
As a home buyer, you want to be prepared for the application process. You have read everything there is to know about the USDA Loan. Your credit is okay, stable income, under the household income limit, and you even found some areas that are USDA eligible.
So, what’s next? What do you need to begin the USDA Loan Approval process? Documentation, documentation, documentation… you will feel like it’s never ending, but getting everything together prior to approval will put you ahead of the game and make the loan process so much smoother.
Income documents you will need for your USDA Loan:
- Copy of driver’s license, social security card or passport
- Most recent 2 years of W2s or 1099s
- Most recent 2 yrs income tax returns for personal and business (all pages)
- 30 days most recent paystubs for borrower and non-borrowers (needs to state year to date gross income)
- Most recent 2 months bank statements (all pages, even if they are blank)
- Most recent social security, pension, retirement or disability award statement
- Divorce decree/ court order for child support or alimony income
Other Important Information
The USDA loan program offers an exceptional number of benefits for people that qualify for USDA financing. There are however, a number of factors that you will need to check on prior to proceeding. Visit the following pages to find out eligibility and other important information and details of interest: -
- Comprehensive detail on the USDA Loan Program
- For details on Benefits
- Eligibility Guidelines
- For details on Income Limits
- For details on Property Eligibility
Interactive Maps showing Eligibility