What are the USDA Credit Requirements with Limited or No Credit History?

What are the USDA Credit Requirements?

Homebuyers often inquire about the USDA credit requirements since many times they might not have sufficient credit established and thus either have no credit scores or very limited credit history otherwise known as thin credit. It’s important to be aware of the USDA credit requirements when qualifying for a USDA loan.

What are the USDA Credit Requirements for Home Buyers with Limited or No Credit History?

Per 1980-D guidelines, the following will not indicate an unacceptable credit history:

(i) “No history” of credit transactions by the applicant

Even though it is possible to qualify under USDA Credit Requirements with no credit, there are still minimum underwriting and credit qualifying conditions that will need to be revised such as the following:

• Verified Rental History:  This comes from either providing your most recent 12 months of cancelled checks that were paid to the landlord or if you live in an apartment complex a verification of rent history form.  Unfortunately when there is limited or zero credit, paying a private individual your rent in the form of money orders or cancelled checks is not generally accepted as proof of payment history.
• Alternative Credit: This is usually a type of credit that does not reflect on your credit report.  Payments that are normally made for electricity, cable, water, phone, & auto insurance, are all good examples.  Underwriters will look for at least 2 to 3 good alternative accounts with no negative payment history that have been open for at least 12 months.
• Savings:  Being able to show a savings patter and liquid assets are considered a strong factor when there is limited or no credit.  A recommended amount to have is at least 3 months of your payment saved as reserves.  This could be in the form of a checking or savings account, 401K, Money Market, etc.  Due to not having an established credit history, being able to document liquid assets can go a long way in approving your loan application.
• Job Stability: Employment history is always a consideration, but in the case of limited or no credit the more stability that can be shown (2 or more years on the same job) the greater help it will be towards supporting a loan approval.

Remember, building alternative credit is not a substitute for having negative credit and will not improve your credit score.  What we discussed today is a solution for home buyers that either have no credit or a very limited history.  The combination of no credit scores with negative credit history will likely be a cause for loan denial.