USDA Loan Credit Requirements 2020
The main aspects of a credit report that is evaluated to determine borrower eligibility for USDA loans are credit scores and credit history. The credit history evaluation analyzes the depth of your credit (such as the number of “trade-lines” and the current standing of such accounts), the payment history on all accounts, and any potential derogatory marks such as collections, tax liens, and judgements.
Credit Score – The minimum credit score required for an automated approval is a 640. If your credit score is below a 640, you may still get approved, but your application will have to be manually underwritten and approved. Also, if your credit score is a 660 or higher, you may be able to receive exceptions for certain disqualifying aspects of your application. Having higher credit scores is considered a “compensating factor”, which can help improve the overall strength of your USDA loan application.
Trade-lines – The USDA recently implemented new rules related to trade-lines. An applicant must now have at least 3 trade-lines. Only 3 are required if one can provide proof of the last 12 months rental history (with no late payments or evictions). If rental history can not be furnished, 4 trade-lines will be required. The great news though is that non-traditional sources are allowed (also known as “alternative trade lines”). This can include anything from health insurance, utilities (electric, gas, water, garbage, etc.), cell phones, cable, internet, and other monthly obligations which payments have been made on time.
Late Payments – It is unacceptable to have any 30 day late payments on your credit report in the last 12 months. This includes late payments on auto loans, credit cards, or any other type of reporting debt.
Foreclosures – Generally, one must wait for 3 years after a foreclosure before they are eligible for a USDA loan. There are few exceptions to this rule, which one may still be able to obtain financing. This includes an “extenuating circumstance”, such as temporary job loss, illness, or other matters which may have been out of ones control and resulted in the foreclosure.
Bankruptcies – The length of time required to pass before being eligible for USDA financing depends on the type of bankruptcy. In many cases, a 3 year time frame must pass before an applicant is able to obtain a USDA loan. This is often the case for each type of bankruptcy, including chapter 7 and chapter 13. However, in some cases, only a 12 month time period must pass before being able to qualify for a USDA home loan. It is a complex matter that will determine what borrowers may still be approved in the 12-36 month time-frame, so we recommend speaking with a loan specialist about your particular case.
Tax Liens – Any tax lien or federal debt must be paid off entirely or deemed to be in good standing (a payment plan in place with proof of payments being made on time). It is not an automatic denial if you have tax liens, as long as a payment plan with sufficient proof of payments being made on time is provided.
Non-Tax Federal Debt – Being delinquent on any non-tax federal debt will result in an automatic rejection of an application. One must be in good standing on federal debts in order to qualify for any government backed mortgage (not just a USDA loan, but also FHA and VA loans).