There’s no such thing as a USDA minimum credit score for those who want to finance or refinance rural property. At least not officially. Unofficially, the story is different. Instead of a USDA loan credit score required by the government, the program allows lenders to set their own minimums.
The fuzzy credit score standards for USDA loans should interest borrowers for two reasons.
First, if you have an imperfect mortgage application, you may still be able to get financing.
Second, while some USDA requirements are set in stone – think of the need to have a property in areas defined as “rural” under the program – other standards are hazy, leaving opportunities for borrowers to obtain financing.
Here’s a look at common credit requirements, income limits and employment guidelines for USDA loans and why they may be more flexible than they seem.
The USDA does not set a minimum credit score requirement, but most lenders require a score of at least 640.
The reason 640 is important is that it’s the minimum score needed to qualify for automatic approval using the USDA's Guaranteed Underwriting System (GUS). GUS is the USDA's automated underwriting system, which speeds the credit risk evaluation process.
It’s possible to qualify with some lenders for a USDA loan even with a credit score below 640. Such applications must be manually underwritten. Even people without a credit score can sometimes qualify. Your lender can supply detail
Many prospective homebuyers are caught by surprise when their credit scores differ from what a free credit monitoring service shows. This happens for several reasons.
First, consumers don't have just one credit score. Each of the nation's three major credit reporting agencies (CRAs) – Experian, Equifax and TransUnion – receive different information from creditors. That information can be scored in dozens of different ways depending on the type of credit you're seeking, such as a mortgage, car loan or credit card.
Historically, lenders have used FICO-brand scores to check a potential borrower's credit. Five main factors go into every FICO score:
If you have bankruptcies, tax liens, items sent for collections, or other negative reports in your credit history, this can hurt your score, at least for a while.
FICO scores are judged on a 300-850 score range. The higher the score, the lower the risk. Each CRA will give you a slightly different score regardless of which credit score you use. When evaluating your application for a USDA loan, lenders will generally choose the middle of the three scores.
Lenders use the median score to assess your credit risk based on the following credit score categories:
| FICO Credit Score Categories | Credit Score Range |
|---|---|
| Exceptional | 800-850 |
| Very Good | 740-799 |
| Good | 670-739 |
| Fair | 580-669 |
| Poor | 300-579 |
Keep in mind that most lenders use the above categories as benchmarks and rely on their own credit score requirements to determine your overall risk.
The underwriting process changes occasionally, and borrowers should be aware of several new considerations.
First, income from gig work is easier to claim if you have the property paperwork, such as tax returns, Form 1099s, and bank statements.
Second, medical bills will no longer appear on credit reports for at least a year. The reason is that the medical billing system often involves delayed insurance payments and multiple bills for the same service.
Third, while FICO-branded credit scores have been used for decades to establish credit standing, lenders will now be able to also use scores from VantageScore. Some lenders may use two credit scores rather than three. The overall result may be lower cost and faster underwriting.
The USDA uses something called a Guaranteed Underwriting System, or GUS, to process borrower risk.
While the USDA does not have a credit score minimum, GUS requires a credit score of at least 640 to automatically qualify for a USDA loan. Borrowers with lower credit scores can still qualify for USDA loans when lenders manually underwrite the applications. However, whether an application is underwritten automatically or manually, borrowers must meet all required standards.
For instance, it’s possible to overcome low credit scores and high debt-to-income ratios (DTIs). This can be done with “compensating” factors such as strong savings, little debt, or working with your current employer for the last two years.
You can learn more about the USDA's underwriting guidelines here.
If you don't have a traditional credit profile, you may still qualify for a USDA loan. You will be asked to provide proof of what's called “non-traditional tradelines,” essentially meaning that you pay your bills in full and on time.
Lenders will often require 12 months of proof that you're paying any of the following on time:
Standards for non-traditional tradelines can vary by lender. For instance, another way to demonstrate creditworthiness if you don't have a FICO score is to show evidence that you've regularly saved money. Having cash reserves in your bank account – say, three months' worth of housing payments – can help convince underwriters you're qualified.
Not having a credit score means manual underwriting is required. This opens up the possibility of loan approval, something which would not be possible through GUS. Your loan officer can help you figure out exactly what you need to qualify.
Whether it's a conventional mortgage or one with a government backing, most home loans feature a minimum credit score. But those minimums can vary by lender, the size of the loan and other factors.
| Loan Type | Minimum Score Requirement | Details |
|---|---|---|
| Conventional | 640 | You'll often need at least a 720 score to tap into the most competitive interest rates. |
| FHA | 580 | Borrowers with scores under 580 need a 10 percent down payment. |
| USDA | 640 | Loan files below this cutoff require manual underwriting. |
| VA | 640 | Veterans will need higher scores for jumbo loans. |
The USDA’s mission is to help low- to moderate-income families own homes. To achieve this goal, the USDA uses income limits to qualify borrowers for financing. In effect, if you earn “too much” you may not qualify for the program.
In general terms, the USDA limit means incomes cannot be greater than 115% of the typical household income in a given area. Income limits count toward all adult household members, whether they are on the loan or not. Because incomes vary at the county level, the amount of qualifying income also varies. This means a borrower may qualify in one county but not another.
You can learn more about USDA loans and income here.
To obtain a USDA loan, the borrower must have the ability to repay the loan. Lenders often determine your repayment ability by looking at your debt-to-income ratio, or DTI.
Applicants are considered to have adequate repayment ability when their total debts do not exceed 41% of their repayment income and their monthly housing expenses do not exceed 29% of their repayment income.
For example, if the household income is $100,000 per year, it means the owners earn $8,333 per month before taxes. This means they can spend as much as $2,417 (29%) for housing and as much as $3,616 on all regular monthly expenses such as housing, auto loans, credit card bills, and student loans.
Importantly, acceptable debt-to-income requirements can vary by lender. For example, a higher DTI might be okay if the borrowers have sufficient “compensating” factors.
Monthly housing expenses, referred to as PITI (principal, interest, taxes, and insurance), may include:
Total debts include PITI plus other monthly credit obligations, including:
Voluntary contributions to retirements and accounts with a zero balance are not considered in the debt-to-income ratio.
Employment is another important consideration when lenders look at a USDA mortgage application.
Lenders typically want a two-year work history, but every employment scenario is different. The key to the USDA’s employment guidelines is to show consistency in your field or profession.
To determine consistency, lenders will look at your current employment, previous employment, education, and other factors.
Overall, the USDA does not want to penalize applicants for frequent changes in employment, as long as employment is in the same line of work and their income has remained at a stable and consistent level.
Gaps in employment are treated differently, depending on the lender. The USDA requires applicants to not have any gap in employment of more than a month within the two years. However, certain job gaps may be overcome with evidence, such as military service, school or re-entering the workforce after taking care of a family member.
Take the next step and see if you qualify for a USDA loan here.
