Credit

Credit Scores and USDA Loans

Chanilia Nixon

The USDA provides USDA lenders certain guidelines to use when evaluating a home loan request. One of these guidelines relates to credit. While the USDA doesn’t set forth a specific credit score requirement, they do ask that lenders validate a responsible credit history. USDA lenders do however establish a minimum credit score and when they do the most common score is 640. Some can be higher or lower but it’s the lenders job to make a judgement on a responsible credit past and a score is a quick and easy way to do so. That said, what’s so special about a score and how are they figured?

There are three primary credit repositories, Equifax, Experian and TransUnion and they each use an algorithm developed by the FICO Company. Because reporting times and different subscribers to these repositories, most times the scores will be similar, but rarely exactly the same. Scores will range from 300 to 850. 

Here are the five categories that make up a score.

Payment History

This is the most important category comprising 35% of the total score. For all credit accounts, including credit cards, student loans and such, the date the payment was received by the merchant is recorded and compared with the due date. Late payments are marked as more than 30, 60 and 90 days late. When a payment falls into one of these three time frames, scores will fall.

Available Balance

Making up 30% of a score, this looks at how much you owe compared to available credit lines. For example, if you have two credit cards both with a $5,000 limit, your total credit line is $10,000. As your balance approaches your credit line, your scores will begin to falter. If your balance goes over your limit, even temporarily, your scores will fall even further.

History

Accounting for 15% of the score, this is how long you have used credit. The older the credit history, the better the score.

Types of Credit

Mortgages and credit card payments are favored while loans from finance companies or subprime loans of any type will harm a score. This makes for 10% of the score.

Inquiries

Any new credit account or even a business looking into your credit history at your request will also cause scores to drop. This final category takes up the final 10% of the score.

Improving Your Credit Score for a USDA Loan

Just like other government-backed loan programs such as VA and FHA mortgages, the USDA does not establish a minimum credit score. Instead, USDA lenders are charged with verifying the borrowers have demonstrated an ability to repay their debts on time. Before credit scores were used, USDA lenders would pore through a credit report line-by-line to see if any payments were more than 30 days past the due date or later and any derogatory credit. They also compared the amounts owed to the available credit.

Today however, credit scores calculate a three digit number reflecting that data and more. This number ranges from 300 to 850. USDA lenders will typically require a minimum credit score of 640. There are three scores, one from each of the main credit bureaus and lenders throw out the highest and lowest and use the middle score. What if your score is lower than 640? If there is a mistake and you can document the credit reporting error, your lender can help get your scores corrected. If the information is correct however, there are two things you can do that will cause your scores to rise.

If your negative credit involves late payments and high balances, your scores will increase across the board over the next few months if you:

  • Stop making payments more than 30 days past the due dates
  • Pay down your balances to approximately 30% of your credit lines

Because your payment history and available credit make for 65% of your total score, paying attention to these two will most impact your score. It’s important to note that a recent bankruptcy or foreclosure will suppress your scores for at least two to three years, but repairing credit isn’t rocket science. Continue to make your payments on time and pay down those balances and wait six to twelve months and see how your scores have improved.