To qualify for a USDA loan you need to have a credit score of 620 or greater. Your USDA loan underwriter will review a copy of your credit report from each of the three credit bureaus (Transunion, Experian, Equifax) to determine your credit score. Each of the three bureaus will assign a credit score based off what is reporting on your credit. The underwriter will throw out the high and low scores and will use your middle score as your credit score.
If your credit score is between 620 and 639 your file will be manually underwritten, meaning that you will need compensating factors to help your loan get approved. If your score is below 640 you will need to provide proof of previous rental history. Also, the underwriter will want to see that you have three open credit accounts, things such as credit cards, car loans, student loans, or installment loans. Ideally, it would be best that your accounts have been open for at least 12 months and have no 30 day late payments. If you cannot supply three open credit accounts it may be possible to use nontraditional credit accounts
In general, If your credit score falls below 640 you should not have had any recent collection accounts (within the last 12 months) on your credit, you must have paid (or be ready to pay) any open collections on your credit report.
If your credit score is greater than 640 you are generally not required to show proof of rent. Additionally, smaller collections are not always required to be paid, as this is determined on a case by case basis by your USDA loan underwriter.
Chapter 7 Bankruptcy
USDA guidelines are that a chapter 7 bankruptcy should be discharged for 36 months before applying for a USDA home loan. If your credit score is above 640, and you have reestablished reasonable credit it is possible to qualify for a USDA loan at less than three years; however you will need to be discharged at least two years for your loan file to be considered.
Chapter 13 Bankruptcy
If you are in a chapter 13 bankruptcy it is possible to qualify for a USDA loan. In order to be eligible for USDA financing you must have been in your bankruptcy for at least 12 months, have your trustee’s permission, and meet the other credit guidelines.
When qualifying for a USDA loan you will need to provide proof of income. The underwriter will want to review the last two years income for any borrower who will be on the loan. Additionally, Rural Development will review your total household income to determine USDA Loan eligibility.
To qualify the underwriter will want to review all income from the previous two years, and will generally want to see no gaps in employment greater than 30 days over the previous two years.
Types of Income
If you are a W2 employee the underwriter will take into consideration your hourly rate, or salary. They will count any overtime, bonus, or commission to determine eligibility for income limits but cannot count these items on your income to help your debt to income ratio – or DTI unless you have at least a two year history at the same job.
Retired or Disabled
If you are on social security, disability, pension, or any type of retirement USDA will want to verify that this income will continue for at least three years. If your income will not continue for three years we will not be able to use the income for loan qualification.
If your retirement income is taxed the underwriter will use the gross amount of the income to help determine your debt to income ratio.
The underwriter will gross up your social security or disability income by 115% to determine your debt to income ratio.
If you are self-employed USDA will review all schedules of your last two years tax returns to determine your income. Any losses will be subtracted from your income, and will affect your debt to income ratio.
Miscellaneous Income Tips
With every government loan the underwriter will request from the IRS a 4506T form for the previous two tax filing years. Any losses, including unreimbursed business expenses will affect your ability to qualify for a loan.
You must have filed taxes the previous two years to be eligible for a USDA Loan.
Credit scores below 640
Credit Scores above 640
If your credit score is 640 or greater the maximum allowable debt to income ratio will be 34% for the front end debt to income ratio and 47.99% for the back end debt to income ratio.
UNDERWRITING DICTIONARY UNDERWRITING TERMS