Your ability to qualify for a USDA home loan with a charge off on your credit report depends on your credit score and how your lender processes your mortgage application. If your credit score is at least 640 and your lender uses the USDA's Guaranteed Underwriting System -- an automated underwriting system also known as GUS -- then you should be able to qualify for a USDA home loan despite the charge off.
In short, underwriting is the process that lenders use to review and approve your loan application. If your credit score is above 640 and there are no other significant issues with your loan application or credit report, lenders typically use automated underwriting to process your mortgage. In this case, you do not need to take any specific action to address the charge off.
According to USDA home loan guidelines, the negative effect of the charge off is already factored into your credit score so there is no need to assess a separate penalty or requirement specifically related to the charge off. Additionally, unless you are currently making payments to resolve the charge off, which would be unusual, it is not factored into your debt-to-income ratio, so it has no impact on the mortgage you qualify for.
Use ourUSDA HOME LOAN QUALIFICATION CALCULATORto determine the mortgage you can afford based on your monthly income and debt expense
If your credit score is less than 640 and your lender manually underwrites your mortgage application, then the charge off may prevent you from qualifying for a USDA home loan. In this scenario, your lender is required to submit a "credit exception" with your application that explains why your loan should be approved, despite a derogatory credit event, which in this case is the charge off.
The credit exception usually includes written explanations from both you and your lender that describes the circumstances that led to the derogatory credit event, the steps that you took to address the issue and reasons why you should qualify for the mortgage. In this scenario it can also be helpful if your application has supporting factors in other areas such as a low debt-to-income ratio or significant financial reserves.
Depending on what caused the charge off, if it was a one-time or repeat issue and other factors, your credit exception and application may be approved or rejected.
To summarize, qualifying for a USDA home loan with a charge off if your credit score is less than 640 is not impossible but it can be more challenging. In short, the USDA must grant you an exception to get approved for the mortgage.
Please note that manually underwriting a loan application and including a credit exception requires additional effort and documentation by you and your lender. Not all lenders are willing or able to perform this extra work so make sure you choose a lender that has experience in this area.
We recommend that you contact multiple lenders in the table below to confirm that they work with applicants with charge offs. Comparing multiple lenders also enables you to find the best mortgage terms.
One additional point I should mention is that the guidelines outlined above apply to the USDA guaranteed home loan program and not the USDA direct home loan or USDA streamline refinance programs. For example, in most cases, having a charge off within the past three years prevents you from qualifying for a USDA streamline refinance.
"Chapter 10, Attachment 10-A, Charge-Offs." Single Family Housing Guaranteed Loan Program Technical Handbook. U.S. Department of Agriculture, 2020. Web.
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