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. Lenders typically use automated underwriting to process USDA home loans as long as your credit score is above 640 and there are no significant issues with your loan application or credit report. So if your credit score is at least 640 and the lender uses automated underwriting, you typically do not need to address the charge off. Additionally, unless you are currently making payments to resolve the charge off, it is not included in your debt-to-income ratio, which improves your ability to qualify for a mortgage. According to USDA home loan program guidelines, the negative effect of the charge off is already factored into your credit score so you are not penalized twice by also including it in your debt-to-income ratio.
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 mortgage application that explains the derogatory credit event, which is a charge off in this case. The credit exception is a written explanation of the circumstances that led to the derogatory credit event and the steps the borrower took to address the issue. Depending on the circumstances that contributed to the charge off such as what caused the issue, if it was a one-time situation and other factors, your credit exception and USDA home loan application may be approved or rejected. Simply put, 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 work by the borrower and the lender. Not all lenders are willing to perform this additional work so you may need to contact multiple lenders to find one you can work with. To summarize, getting approved for a USDA home loan with a charge off if your credit score is less than 640 is not impossible but it can be highly challenging.
We provide a comprehensive overview of the USDA home loan program on FREEandCLEAR for you to review. You can also use our USDA Mortgage Qualification Calculator to determine what size USDA loan you can afford.
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 disqualifies you from the USDA streamline refinance program.
Finally, we always recommend that you contact multiple lenders to understand how they would handle your unique situation. You can review lenders in your area by clicking INTEREST RATES We advise you to contact at least four lenders as USDA home loan qualification guidelines vary.