The USDA home loan program offers affordable financing to low- to moderate-income homebuyers. But each lender has different credit score requirements. The USDA doesn’t have a strict minimum, but it’s still important to know these rules.
Getting a mortgage can be a complicated and stressful process. But USDA loans offer a more accessible path to homeownership for eligible borrowers in rural areas. If you’re wondering how hard it is to get a USDA loan, here’s what you need to know.
What Is a USDA Loan?
USDA loans are government-backed mortgages aimed at helping low-to-moderate income buyers in rural and suburban areas achieve homeownership. These zero-down payment loans are funded by private lenders and guaranteed by the United States Department of Agriculture (USDA).
Some key features of USDA loans include
- Requires no down payment or minimum credit score
- Offers low interest rates
- Allows high debt-to-income ratios
- No mortgage insurance required
- Fixed 30-year loan term
- Can be used to build, buy, improve or relocate a home in eligible rural areas
Because USDA loans are government-backed, they offer more flexible lending standards than conventional mortgages. This makes them a great option if you don’t have a lot of cash saved up or have less-than-perfect credit.
USDA Loan Eligibility Requirements
To qualify for a USDA-backed mortgage, you must meet certain eligibility criteria
Income Limits
Your family’s income can’t be more than what the law says in your county. The income limits are between 80% and 115% of the average income in your area.
Home Location
The property must be located in a USDA-designated rural or suburban area. Over 97% of U.S. land is potentially eligible. You can check your address with the USDA’s eligibility tool.
Credit History
There is no minimum credit score, but most lenders want at least a 640 FICO score. The USDA reviews your willingness and ability to repay debts.
Occupancy Status
You must make the home your principal residence and occupy the property within 60 days of closing. USDA loans cannot be used for vacation homes or rental properties.
Citizenship
At least one borrower must be a U.S. citizen, U.S. non-citizen national, or qualified alien.
Debt-to-Income Ratio
Your total debt-to-income ratio can be as high as 41% with compensating factors.
Repayment Ability
You must show that you can afford to pay back the loan based on your income, debts, assets, and the proposed mortgage payment.
Prior USDA Loan
If you’ve already gotten a direct or guaranteed loan from the USDA, you may need to meet certain requirements to get another one.
The USDA Loan Process
If you meet the eligibility criteria, follow these steps to get a USDA-backed mortgage:
1. Get Pre-Approved
Work with a USDA-approved lender to assess your finances and get pre-approved for an amount. Pre-approval usually takes 1-2 weeks.
2. Find a Home
Search for a home in an eligible area that is within your pre-approval amount.
3. Make an Offer
Make an offer and negotiate the purchase price with the seller.
4. Complete Loan Application
Provide documents to your lender to complete the full loan application. Allow 2-4 weeks for underwriting.
5. Home Appraisal
The lender will order an appraisal to ensure the purchase price is appropriate.
6. Loan Approval
The lender will submit your file to the USDA for final approval, which takes up to 15 days.
7. Closing & Move In
Once approved, you’ll sign the final paperwork, get the keys and move into your new home!
The entire USDA loan process usually takes 45-60 days from pre-approval to closing. Having all your financial paperwork ready can help speed up the process.
How Hard Is It to Get Approved?
Because USDA loans are government-backed with flexible credit guidelines, they may be easier to get than conventional mortgages. Here are some key factors that influence your approval odds:
Credit Scores
The higher your scores, the better. Many lenders look for at least 640 FICO. Under 600 could lead to a denial.
Income Verification
Provide tax returns, pay stubs and other documentation to validate your income. Insufficient verification can delay or deny approval.
Low Debt-to-Income Ratio
Keep your DTI below 41% if possible. DTIs above 45% often require extra documentation.
Down Payment
No down payment is required. But you still need closing costs, so save around 2-5% of the purchase price.
Property Condition
For existing homes, inspections identify any repairs needed to meet USDA standards.
Preparing in advance by maintaining good credit, keeping debt low, and documenting income can go a long way towards making your approval process smooth and straightforward.
Alternatives if Denied for a USDA Loan
If your USDA loan application is denied, don’t give up. A few options include:
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Appeal the Decision – Ask your lender if they can appeal or reconsider your application. Provide more documentation if needed.
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Improve Your Finances – Take time to boost your credit, lower debts or save more for a down payment. Then reapply after a few months.
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FHA Loan – FHA loans only require 3.5% down and also work for those with lower credit scores.
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VA Loan – For qualifying military members, veterans and their families. No down payment or mortgage insurance required.
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Alternative USDA Options – Ask about USDA direct loans or the Single Family Housing Repair loan/grant.
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Owner Financing – Some sellers may finance the purchase directly if you can’t get a traditional mortgage.
Don’t get discouraged if your first USDA loan application is denied. With some time and financial improvement, plus alternative options, you can still make your homeownership dreams a reality.
The Bottom Line
While USDA loans are easier to obtain than conventional mortgages, it still pays to prepare your finances. Maintaining good credit, keeping debts low, and verifying income can help streamline the process. Stumbling blocks like low scores or high DTIs can be overcome through careful documentation and appeals. With perseverance and the right USDA lender on your side, you can be well on your way to owning your own home, even with challenging finances.
How Mortgage Credit Scores Are Determined
Credit scores are a numerical indication of your financial habits, typically ranging from 300 to 850. A higher score points to on-time bill payments and smart management of your finances overall. A lower score indicates less responsibility with credit and may pose more risk to a mortgage lender.
Mortgage lenders typically use a borrowers middle credit score from the three major credit bureaus—Experian, Equifax, and TransUnion—to assess credit risk and determine loan eligibility.
FICO scores, developed by the Fair Isaac Corporation, are the most commonly used credit scores in lending decisions. These scores are calculated based on credit data from each bureau, but because lenders report information differently, a borrowers credit score may vary between the three bureaus.
FICO scores are based on these five items:
- Length of credit history
- Payment history
- Total amount owed
- Types of credit
- Credit inquiries in your name
To be clear, there isn’t one single credit score. Since FICO scores are calculated based on the information in each bureaus report, a borrower may have three different FICO scores, one from each bureau. All three credit bureaus calculate scores in slightly different ways, and USDA lenders consider the middle score of these three when evaluating your application. In instances when only two scores are present, theyll use the lower of the two.
What is the minimum credit score for a USDA loan?
USDA direct and USDA guaranteed loans have no set credit score minimum.
USDA direct loans have no minimum credit score requirement and are available only through the USDA for very low- and low-income borrowers.
USDA guaranteed loans, offered by USDA-approved private lenders, typically require a minimum credit score of 620, though requirements vary by lender.
✅ Neighbors Bank typically requires a minimum FICO score of 620.
If your credit score is below 620, it will be difficult to receive loan approval, however, it still may be possible if you have other strong financial factors to compensate for a lower score.
Neighbors Bank offers free credit consulting to borrowers who dont meet our credit requirements. Get in touch today!
Pros and Cons of a USDA Loan | All You Need to Know About USDA Home Loans EXPLAINED
FAQ
What are the disadvantages of a USDA loan?
Property type limitations: You can only use a USDA loan for primary residences. Income-producing investment properties or vacation homes cannot be purchased with a USDA loan. Income limits: Even if you’re interested in living in a rural area, you may earn too much to qualify for a USDA loan.
Why would an USDA loan get denied?
If you want to get a USDA loan but can’t, it’s usually because you make too much money or the house you want to buy isn’t in an eligible area. Sep 11, 2024.
How long does USDA approval take?
Lenders request income documentation to confirm your income and USDA eligibility before they will issue a preapproval. After you find a house and sign a contract to buy it, it usually takes 30 to 45 days to apply for a USDA loan.
What credit score do I need for a USDA loan?
For USDA loans, lenders typically require a credit score of 620 or higher. However, some lenders may be flexible and consider applicants with lower scores, especially if they have other strengths like a low debt-to-income ratio or a history of on-time payments.