Things are getting tougher out there for homebuyers between rising home prices and climbing interest rates.
But for people wanting to live in suburban or rural areas, there is a federal program that can make buying a home a whole lot easier. USDA loans are designed to help low- and middle-income families buy property, and they’re a pretty incredible deal.
USDA loans are zero-down loans with competitive interest rates that don’t require you to have spotless credit. Though there are income limits and other financial requirements to get a USDA loan, even people without a credit score at all can sometimes qualify.
But let’s slow down. Credit scores have a reputation for being mysterious, and each of the three credit reporting agencies figures the score a little bit differently.
According to Experian, though, there are seven main factors that go into every score:
Each of the three credit reporting agencies, Experian, Equifax, and Transunion, will give you a slightly different score. When evaluating you for a USDA loan, the loan officer will generally choose the middle of the three scores, though each lender has its own way of calculating the exact number.
The USDA uses something called a Guaranteed Underwriting System, or GUS. It’s basically an automated way of qualifying people for loans. To automatically qualify, you need a credit score of 640 or higher.
Not quite there yet? Don’t despair. People with lower credit scores can still qualify for USDA loans using manual underwriting, it just takes a little bit more paperwork.
So what does manual underwriting mean? It means that even though you weren’t automatically qualified for a loan, you might still be able to qualify with the help of a human underwriter. Their job is to look at compensating factors to decide if you qualify for a loan.
Compensating factors are the things that explain why you have a low credit score, or things that show that, despite your low credit score, you have the ability to pay back the loan.
For example, if your credit score was hurt because of a temporary situation like a layoff or medical emergency, and you can prove that you now have a job, it can help your application.
Or if you’re a recent college graduate with the potential for higher earnings in the near future, that could be a compensating factor.
Manual underwriting is also called “common sense” underwriting, and it just means that even though your numbers don’t quite check all of the boxes lenders want to see, if you can explain why you’re still a good candidate, you may still qualify for the loan.
Just bear in mind that you’ll need to provide more documentation (that will be specific to your situation) and your loan application will take longer to process.
Because USDA loans are actually made by lenders (who have to approve the loan), then approved by the USDA, the organization providing that lender with insurance, you may have to go through several different rounds of providing documentation.
If you don’t have traditional credit, either because you are new to the workforce, new to the country, or just choose to live an all-cash lifestyle, 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 want to see at least 12 months of proof that you’re paying any of the following on time:
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.
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.
Type of Loan
Common Minimum Score
You’ll often need at least a 720 score to tap into the most competitive interest rates
Borrowers with scores under 580 need a 10 percent down payment
Loan files below this cutoff require manual
Veterans seeking jumbo loans will often need a higher score.
Borrowers can benefit by exploring all of their home loan options. Some loan types may be a better fit than others depending on your specific situation.
For many rural and suburban homebuyers, the USDA loan program offers some major benefits.