Can you get a USDA home loan with a credit score below 640?

By Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience

Edited by Michael Jensen, Mortgage and Finance Guru

Updated October 20, 2020

The minimum credit score for the USDA home loan program is 640 although borrowers with lower scores may be able to qualify in certain cases.  As we outline below, qualifying with a lower score requires additional effort but is possible with the right approach, documentation and lender. 

To be approved for a USDA loan with a credit score of less than 640, your lender is required to submit a "credit exception" with your mortgage application. A credit exception is a written explanation of the derogatory credit event that caused your lower score and the steps you took to correct the issue.  In short, the credit exception explains why you should be approved for the mortgage despite not meeting the regular credit score requirement.

In addition to the documentation provided by the lender you are also usually required to submit a letter of explanation that outlines the reasons why your score is low and how you addressed the issue.  Depending on the circumstances that contributed to the drop in your score, including if it was a one-time situation or the result of multiple negative events, your credit exception and application may be approved or rejected.

The scenarios when credit exceptions are usually permitted include the following:

events that occurred one-time

events that were temporary or short-term in duration

events outside of your control

if the event was addressed and resolved at least one year prior to submitting your loan application

Examples of acceptable credit exception situations include a medical issue or illness, temporary job loss, decrease or loss of benefits or a business dispute.  The other case when a credit exception is allowed is if your new USDA loan reduces your total monthly housing expense, including your mortgage payment, property tax, homeowners insurance and insurance fee, by at least 50%.

The lender also reviews the credit exception within the context of your overall application.  Supporting factors such as a low debt-to-income ratio or significant financial reserves may help your application get approved. 

Simply put, if the situations or circumstances outlined above apply to you, then the USDA is likely to grant you an exception and approve you for the mortgage even though your credit score is low.  If your low credit score is the result of multiple negative credit events such as repeated account delinquencies, missed payments or charge offs, then your credit exception is less likely to be approved.

We should also point out that specific program eligibility guidelines apply to significant derogatory credit issues such as a foreclosure, short sale, default or bankruptcy and you are required to satisfy a waiting period following these events before you can apply for a USDA home loan.  

Please note that submitting a credit exception requires additional work by both you and your lender because it involves manually underwriting your loan application as opposed to using the USDA's standard automated underwriting process.  Manual underwriting involves more effort and paperwork and the process is generally more challenging and time-consuming.  Plus, there is no guarantee that your application is approved, which means all that extra work may not pay off.

For these reasons, not all lenders are willing or able to work with applicants that require manual underwriting.  We recommend that you contact multiple lenders to understand if they have experience with USDA home loan manual underwriting and working with credit-challenged applicants.  Be sure to review your specific situation and credit score before you select a lender and submit your application.

Sources

"Chapter 10, Attachment 10-A, Credit Exceptions."  Single Family Housing Guaranteed Loan Program Technical Handbook.  U.S. Department of Agriculture, 2020.  Web.

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