How to get a USDA Loan with Bad Credit?
Buying a home can be a very daunting process, especially if you’re worried about whether your credit will qualify. While credit is very important in the approval process, there are many different loan options and products you can use to get your dream home.
First off, what is a USDA Loan? USDA stands for US Department of Agriculture and is a loan product available in certain geographic areas. These loans require no down payment and have lower, more flexible credit guidelines which can give individuals with “bad credit” the opportunity to buy a home.
USDA Loan Credit Benchmarks
USDA Loans have a minimum credit score requirement of 620.
Keep in mind that this is the minimum credit score required for a USDA loan, and with lower credit scores, there is more verification needed to move forward with a loan.
Credit score below 640
Companies look at your credit score to determine the level of risk associated with your specific loan. The lower the credit score, the higher the repayment risk is, meaning the harder it is to get acceptable fundings and a good interest rate for the borrower.
The best course of action if you have a sub-640 credit score is to work towards building your credit so you can qualify for a loan. If you have above a 620 credit score, you may still be eligible for a USDA loan, though, you should expect more verification requirements you’ll need to meet throughout the process.
Building Credit for a USDA Loan
The most important thing you can do to build credit for a USDA loan is to pay down your credit cards. The lower the balance compared to the credit limit, the better your credit will look.
The second easiest thing to do to boost your credit is to pay off your medical collections. These are automatically deleted from your credit report once paid!
Here are some additional things you can do to build your credit:
Keep three revolving accounts open and active
- Do not close your revolving accounts (credit cards, store accounts, etc.), these are likely helping you. Be sure to continue using your accounts, this shows creditors that you can use credit responsibly without heavily relying on it.
- If you do not have credit cards, get them when you are able to do so. Responsible credit card use is the fastest way to increase your credit score.
- You can often get a “secured” card if your credit is not where it needs to be to get another type of card.
- Here are some of the most basic and easiest to get credit cards. They are all secured and should have no annual fees:
- Open Sky Secured Credit Card
- Capital One Secured Credit Card
- Discover Secured Credit Card
Have all collections removed
- Call the collection company and ask for it to be removed, as if it were never there. You can generally get a collection removed if you are convincing and offer to pay it in full. This will typically make a huge difference in your credit.
- If getting the collection removed doesn’t work, settling to a $0 balance is typically the next best move.
Keep in mind, that new installment loans and car loans can drop your credit in the short term
- New loans increase the total debt owed and change your credit utilization ratio, which may cause a slight drop in your score.
- Credit builder installment loans typically do not help you as much as you think! It adds a new inquiry on your account, reduces your average tradeline length, and opens a new account.
Make all of your payments on time
- Paying off what you owe and being consistent with your payments are two of the most important factors in a great credit score.
Things to do to Improve Credit
- Keep the revolving utilization of your credit cards low – 30% or less.
- Limit inquiries on the credit for loans and credit cards.
- Avoid opening new accounts.
- Pay off medical collections.
- Pay off derogatory credit.
- Make payments on time.
Things to Avoid
- Neglecting your credit card payments
- Making late payments
- Opening new accounts
- Maxing out your credit cards
It’s important to note that a USDA loan is a household income eligibility loan product. This means that everyone in the house over the age of 18 needs their income reviewed.
Only individuals that are going on the loan need to have their credit reviewed; unless you reside in a community property state, in which your spouse must have their credit reviewed for the loan.
Community property states, which include Arizona, California, Idaho, Lousiana, Nevada, New Mexico, Texas, Washington, and Wisconsin, require any married individual to include their spouse’s credit report on a loan application in order to receive funding.