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USDA Loan Income and Credit Eligibility

Lenders look at debts, income and credit history to determine if an applicant is able to take on a USDA mortgage. Fortunately, USDA loans offer many advantages to help low- and middle-income families buy a home.

This section breaks down common credit requirements, income limits and employment guidelines for a USDA loan.

Article Index

  1. USDA Loan Credit Score Requirements
  2. How Credit Scores Work
  3. What is the minimum score required to qualify for a USDA loan?
  4. Non-Traditional Credit and USDA Loans
  5. Compare USDA Credit Score Requirements
  6. USDA Loan Income Limits
  7. USDA Loan Income Requirements
  8. The PITI Ratio
  9. Total Debt-to-Income Ratio
  10. USDA Loan Employment Requirements

USDA Loan Credit Score Requirements

The USDA does not set a minimum credit score requirement, but most lenders require a score of at least 640, which is 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 automates the process of credit risk evaluation.

It is possible to qualify with a score below 640 with some lenders, but those files require manual underwriting. Even people without a credit score at all can sometimes qualify, though there are other income and financial requirements they must meet.

Credit guidelines can vary by lender and other factors.

How Credit Scores Work

Many prospective homebuyers are caught by surprise when they apply for a mortgage and see scores that differ from what a free credit monitoring service shows.

First, it's important to note that 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 and score that information dozens of different ways depending on the type of credit you're seeking, such as a mortgage, car loan or credit card.

The majority of lenders utilize FICO scores to check a potential borrower's credit.

There are five main factors that go into every FICO score:

  • Payment history (35%). Are you on time with your bills, or do you have a habit of being late? Anything over 30 days overdue can ding your credit.
  • Amounts owed (30%). That's a number that shows how much debt you have, i.e. how much of your available credit you're using. Over 30 percent utilization can be a red flag.
  • Length of credit history (15%). If you don't have at least 12 to 14 months of credit history, that can lower your score. The longer the record, the better.
  • Credit mix (10%). The more kinds of credit you have, the better. For example, a credit card, a store card, and a loan like a mortgage or auto loan shows a good mix.
  • New credit (10%). How many credit lines do you have? Ideally, you have several, but opening a bunch of new accounts all at once can hurt your score, especially if you don't have a long credit history.

If you have bankruptcies, tax liens, anything sent to collections, or any other negative things 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 you 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

Excellent

750 and higher

Good

700 - 749

Fair

650 - 699

Poor

550 - 649

Bad

549 and lower

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.

What is the minimum credit score required to qualify for a USDA loan?

The USDA uses something called a Guaranteed Underwriting System, or GUS, to help automate the process of evaluating the risk of a borrower to speed up the qualification process.

While the USDA does not set a credit score minimum, GUS requires a credit score of at least 640 to automatically qualify for a USDA loan. People with lower credit scores can still qualify for USDA loans using manual underwriting, which typically involves more stringent guidelines.

Manual underwriting means that even though you weren't automatically qualified for a loan, you might still be able to qualify with the help of compensating factors.

Compensating factors are positive points that can strengthen your loan file, such as cash reserves, low debt and more.

You can learn more about the USDA's underwriting guidelines here.

Non-Traditional Credit and USDA Loans

If you don't have a traditional credit profile, you can still qualify for a USDA loan. You will be asked to provide proof of what's called a "non-traditional tradeline," essentially meaning that you pay your bills on time.

Lenders will often require 12 months of proof that you're paying any of the following on time:

  • Rent
  • Utility bills
  • Insurance
  • Childcare
  • Medical bills
  • Car lease
  • Personal loan
  • School tuition
  • Cell phone bills

Guidelines and policies on non-traditional tradelines can vary by lender and other factors. Another way to show your creditworthiness if you don't have a FICO score is to show evidence that you've saved money regularly. 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 you will be doing manual underwriting, and so your loan officer will be able to help you figure out exactly what you need to qualify.

Compare USDA Credit Score Requirements

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

660

You'll often need at least a 720 score to tap into the most competitive interest rates.

FHA

640

Borrowers with scores under 580 need a 10 percent down payment.

USDA

640

Loan files below this cutoff require manual underwriting.

VA

620

Veterans seeking jumbo loans will often need a higher score.

USDA Loan Income Limits

The USDA’s mission is to help low- to moderate-income families realize the dream of homeownership. To achieve this goal, the USDA enacts income limits, adjusted for family size, as established by HUD.

The USDA income limits are defined as the greater of:

  • 115% of the U.S. median family income for the area or
  • 115% of the average between the state-wide and state non-metro median family income or
  • 115/80ths of the area low-income limit adjusted for household size for the county or MSA where the property is, or will be, located

Income limits count toward all adult household members, whether they are on the loan note or not.

You can learn more about USDA loans and income here.

USDA Loan Income Requirements

In order to obtain a USDA loan, the borrower must be willing and able 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 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.

Guidelines on debt-to-income ratio can vary by lender and other factors.

The PITI Ratio

Monthly housing expenses, referred to as PITI (principal, interest, taxes and insurance) may include:

  • Principal and interest payment
  • Hazard or flood insurance premiums
  • Real estate taxes
  • HOA dues
  • Special assessments

Total Debt-to-Income Ratio

Total debts include PITI plus any other major monthly credit obligations. This may include:

  • PITI
  • Vehicle payments
  • Student loan debt
  • Credit card payments
  • Co-signed loans

Voluntary contributions to retirements and accounts with a zero balance are not considered in the debt-to-income ratio.

USDA Loan Employment Requirements

Along the lines of income is employment, which plays a vital role in qualifying for a USDA loan. Yes, you certainly don’t need a job, as anyone who’s retired can attest, but for those who are still working, it can be difficult to secure a USDA loan without a stable track record of employment.

Lenders typically at minimum look at your two-year work history, but every employment scenario is different. The key to the USDA’s employment guidelines is maintaining 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 wish to penalize applicants over frequent changes in employment, as long as their 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 lender, but the USDA requires applicants to not have any gap in employment of more than a month within the two-year period. However, certain job gaps may be overcome with evidence, such as military service, school or re-entering the work force after taking care of a family member.

Take the next step and see if you qualify for a USDA loan here.

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