Does Credit Card Debt Affect a USDA Loan?
Low-to-moderate income home buyers in rural communities have a mortgage option many consumers are unfamiliar with. It's a U.S. Department of Agriculture, or USDA, loan, and it allows creditworthy people of modest means to purchase homes with no money down. As is the case with other government-backed loans, both the borrower and the home must pass muster during the application and underwriting process. One factor the underwriter looks at regarding the borrower's eligibility is his credit history.
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Credit History
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The USDA lists conditions that cause it to consider an applicant's credit history unacceptable for a USDA loan. These conditions include more than one account with a 30-day-late payment over the past year; two or more 30-day-late rent payments over the past three years and collection accounts for which the applicant hasn't made payment arrangements. The USDA also considers unacceptable debt-to-income ratios higher than 29/41, meaning that a mortgage payment should comprise no more than 29 percent of a borrower's gross monthly income, and recurrent debt payments including the mortgage payment, credit cards, loans and other debt should comprise no more than 41 percent of the applicant's gross monthly income.
Adverse Credit Waiver
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A borrower with credit issues that render her credit history unacceptable to the USDA may request an adverse credit waiver if special circumstances led to the credit problems but since have been resolved. The USDA issues waivers for such items as medical expenses because of a prior illness.
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Debt Ratio Waiver
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The USDA may issue a debt ratio waiver to an applicant with a debt ratio higher than 29/41. The applicant must meet special criteria, however. If the applicant will have cash left after paying the down payment and closing costs; shows that he's likely to advance quickly in his career and earnings; demonstrates that he uses credit conservatively; or receives bonuses or income from a job too new to have included in his application, he may qualify for a waiver. The USDA will waive ratios for all applicants with credit scores of 660 or higher.
Credit Scores
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Although no minimum credit score exists for USDA loan approval, there are guidelines for the handling of applications from borrowers based on their credit scores. Scores of 620 or higher qualify borrowers for a streamlined process that allows the lender to accelerate the application processing. The USDA does not require these borrowers to document an adverse credit history or explain or take action on derogatory items. Scores of 580 to 619 prompt lenders to examine credit carefully and document negative items. Lenders typically do not approve loans for applicants with credit scores of less than 580 if their histories contain any of the items the USDA deems unacceptable.
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