Credit Scores and the USDA Rural Development Loan Program
The USDA Rural Development Loan Program is one of the most credit score friendly loan program currently available. While USDA is willing to work with scores lower than 620 most lenders won't. Thus, pragmatically the minimum credit score required by USDA is 640.
For homebuyers with a minimum credit score of 620 lenders may streamline the credit approval process normally required as part of the underwriting process. This means that a borrower:
- Will not have to document a rent history provided their approval level is GUS "Accept"
- A negative past credit history may allow the Underwriter to not request letters of explanation for the cause of the past challenges
- Collection accounts can remain open provided the Underwriter believes it unlikely that the account will eventually turn into a judgment
However, USDA is not willing to overlook certain overtly negative credit items even when the credit scores are over 620. For instance borrowers with any of the following adverse past credit should not expect to obtain credit approval using the USDA loan program:
- Foreclosure or short sale within the last 3 years
- Chapter 7 bankruptcy discharged within the past 3 years
- Chapter 13 bankruptcy debt restricting plan completed within the last 12 months
- Late mortgage payments within the last 12 months
- Applicant or co-applicant delinquent on a federal debt; such as taxes, student loans, or previous agency loan (i.e. VA loan in which the eligibility was forfeited due to a foreclosure)
USDA may be willing to give a borrower an exception to a past bankruptcy or foreclosure prior to the three year period provided the borrower can document the cause of the past negative credit experience as being related to an illness or job loss and unlikely to reoccur.
Once the credit score exceeds 680 or the credit scores are over 640 and the USDA underwriting decision is an "Accept/Eligible" finding, USDA allows this score to be considered as justification for allowing the borrowers debt-to-income-ratio to exceed the target ratios of 29% for the housing costs and 41% for the total debt ratio. Frequently USDA will approve loans with the housing ratios upto 33.99% and total debt load upto 45.99%.
Bottom line the USDA Rural Development Loan Program is more flexible in approving a perspective borrower than many other loan program. But like any loan program today, the Loan Officer shouldn't assume that this level of credit flexibility will result in an automatic positive underwriting decision if the Underwriter doesn't feel strongly that the borrowers chance of success at homeownership is strong.
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