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How Do You Qualify For A Credit Waiver With A USDA Loan?

July 11th, 2014 by Sean Stephens

Is qualifying for a credit waiver with a USDA loan difficult?

Today’s topic is important, because while many lenders only process automated approvals, understanding how a USDA credit waiver works could be the source of a financing 2nd chance to many potential homebuyers.

As a starting point, USDA files that receive a GUS Accept response and do not have to be manually downgraded – will NOT require a credit waiver.

First off, USDA guidelines require the applicant to have a credit history which indicates a reasonable ability and willingness to meet obligations as they become due.

Credit waivers will be needed on files which have been approved by underwriting, and have indicators of negative (adverse) credit.

In these situations, the lender may establish mitigating circumstances to establish the borrower’s intent for good credit when the applicant provides evidence to support that the adverse credit was:

  1. Temporary in nature
  2. Beyond the applicant’s control, and
  3. Circumstances contributing to the adverse credit have been removed.

Examples of supporting documentation which could be provided by the borrower are:

  • Hardship letters signed & dated by the applicant
  • Attorney letters if applicable
  • Medical documentation
  • Evidence of payment arrangements or payment history with creditors

Once this evidence has been provided, a properly documented credit waiver can be generated which explain the details surrounding the adverse credit, and reinforces the request for loan approval.

Here are the steps in the process:

1. Applicant

  1. Must demonstrate an acceptable ability and willingness to pay debts on time
  2. In cases of negative credit, they must supply the lender with evidence to support their circumstances and intent for good credit

2. Lender

  1. Review credit of all applicants
  2. Identify any adverse credit per USDA guidelines
  3. Review explanations, hardship letters, and documentation provided by applicant
  4. If approved, then must submit a proper credit waiver to USDA (RD)

3. USDA Rural Development

  1. Reviews credit report
  2. Reviews credit waiver submitted by the lender
  3. Ensures that credit waivers meet USDA qualifying guidelines
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