If you have bad credit, you might think your chances for getting any type of mortgage is out of the question. Luckily, there are options and it includes the USDA loan. The USDA program is meant to help promote homeownership in those that otherwise wouldn’t be able to secure a loan. That being said, there are ways you can still get approved even if you have bad credit.
The USDA Minimum Credit Score
The USDA requires a 640 credit score in order to qualify for the loan program. That’s a fairly low credit score requirement, especially when you can secure 100% financing. Don’t worry if you have a credit score lower than 640, though, as you may still have options.
The USDA requires a 640 credit score in order for you to take advantage of automated underwriting. If you have a credit score lower than 640, you may still qualify, you just have to go through the manual underwriting process. This means that your loan file will be evaluated a little more closely than one that goes through the automated system.
Your Credit History Matters
If you don’t have a 640 credit score, don’t panic. The USDA cares more about your credit history than the score itself. While you may not be able to make your credit score increase quickly, you can change the way your credit history looks.
Let’s say you have had credit issues in the past. Maybe you fell ill and didn’t have income for a few months, so you fell behind on some of your payments. If immediately following the issue, you got current on your debts and continued making your payments on time, it will bode well for your chances to get a USDA loan. Underwriters look at the history very closely. They don’t look for perfect credit. Instead, they look to see that you knew how to make things right when things did get bad.
The USDA looks closely at the last 12 months. If you know you had a few months in that time when things weren’t good, you may want to wait. Applying for a USDA loan when you have a solid 12 months of a good credit history will help increase your chances of loan approval tenfold.
How to Make Your Credit Better
We know it can be hard to keep your credit history looking ‘great.’ If you went through some tough times and are now trying to get back on your feet, you may need some help getting there. You can use the following tips to help you increase your credit score and improve your credit history:
- Pay all of your bills on time. Even if you paid bills late in the past, put it behind you and pay everything on time moving forward. Try to avoid any late payments during this time to keep your credit history as clean as possible.
- Don’t overextend your credit. A large part of your credit score is your credit utilization rate. The more credit you have outstanding, the higher your credit utilization rate. This usually results in a lower credit score. Try to keep your outstanding balance at no more than 30% of your total available credit to avoid damaging your credit score.
- Don’t open new credit. Don’t even apply for new credit. Let your existing credit accounts age. The older your credit accounts are, the better your credit score will become. If you apply for new credit, it brings the average age of your credit down, which can hurt your credit score.
- Don’t close old credit accounts. Even if you have credit cards you no longer use, don’t close them. Again, the average credit age will decrease, which can hurt your credit score. Just leave the accounts untouched, but open. The unused credit can help your credit utilization rate too.
Obtaining a USDA loan with bad credit isn’t impossible. If you have to go through the manual underwriting process, just make sure you clean up your credit as best you can. Lenders look for a timely payment history and responsible use of your credit in order to approve you for a loan.
The USDA program offers 100% financing with flexible underwriting guidelines, even if you have to go the manual underwriting route. If one lender turns you down for a USDA loan, try applying with another. Each lender has their own guidelines and risks they are willing to take.
Meta Description: You can get a USDA loan even if you have bad credit, you just need to clean up your credit history and give the lender a good reason to loan you the money.