The United States Department of Agriculture (USDA) is now offering home loans to borrowers with credit scores as low as 550. That’s right, you can get a USDA loan with a 550 credit score, and it’s possible to get 100% financing on this transaction, even when your credit is less than ideal.
How to Get a USDA Loan with a 550 Credit Score
Purchase or Refinance
With a USDA loan, you can purchase or refinance your home even if you have a credit score of 550. The USDA guidelines state that you can get 100% financing for the property, but the loan-to-value ratio will need to be based on an appraised value. This appraised value can only be exceeded by the guarantee fee.
You can also get streamline refinancing with 100% loan-to-value with a FICO score of 550. This transaction, however, must pay off an existing USDA loan. Section 502 Direct Loans are not eligible for this option, and appraisal is not required.
Requirements for Your Loan
Maximum Loan Amount for Purchase and Refinance
When you use a USDA loan with a 550 credit score, the maximum loan amount cannot exceed 100% of the appraised value, and the total cannot exceed the sum of the appraised value plus the guarantee fee. For purchase transactions, when the sales price is lower than the appraised value, closing costs may be financed into the loan amount up to the sum of the guarantee fee and appraised value.
Maximum Loan Amount Streamline Refinance
The maximum amount of your loan for a streamline refinance cannot exceed the total of the existing loan plus any interest that has been added to the balance. Re-conveyance fees and guarantee fees can be added to the refinancing. However, delinquent interest, late fees, closing costs, and other fees are ineligible for refinancing, and the new loan may not exceed the original purchase-loan amount.
The USDA is focused on providing loans for homes in certain rural and suburban areas. The house doesn’t need to be in the countryside, but it does need to be within specific areas designated by the USDA. You can check area eligibility at the USDA’s eligibility website.
USDA Loans: Requirements for the Property
Before using a USDA loan with a 550 FICO score, a full appraisal of the property will be required. The appraiser will need to confirm that the home meets FHA minimum requirements. Also, the appraisal will need to be within 120 days of the loan closing.
To be eligible, the property must provide “decent, safe, and sanitary” living at a “modest” price. Certain condos and manufactured home built after June 15th, 1976 are eligible for the program.
First of all, properties not located in a USDA zone are ineligible for financing. There are also many disqualifying factors, such as property served by cisterns or properties with hauled-in water.
To be eligible, the condo must meet the project standards set by the FHA. An HOA questionnaire and master policy are also required to certify the project.
If a manufactured home is newly constructed, it is likely eligible for financing through the USDA, meaning you could purchase a manufactured home with a FICO score of 550. However, the property must be permanently affixed to the property, and construction must have been completed within the last year.
Properties that have been completed within the last 12 months are considered “new construction” by the USDA. This classification also includes projects that were completed more than 12 months ago but have never been occupied. To be eligible, the lender will need to ensure a copy of occupancy or a copy of eligible building permit, which will need to include inspections of specific components, such as plumbing and electrical. There will also need to be at least one year builder warranty on the home and the insulation will need to meet specific requirements.
Properties completed more than 12 months ago are also eligible. In this case, a certificate of occupancy is required for the property.
Requirements for Property Condition
Properties rated “C5” or worse are ineligible for USDA financing. Appraisers use a C-rating system (“C” for “Condition”), with C1 being virtually perfect, and C6, worst possible rating, requiring significant repairs. If a property is rated C5 or C6, the home will need to be repaired before it is eligible for USDA loans with a 550 credit score.
Other Possible Requirements
There could be many other requirements for both the borrower and the property, including termite inspections, septic certifications, flood insurance, and insurance ratings. Be sure to talk with a lending expert who can help you understand these possible requirements.
Types of Financing Available
When you seek a USDA loan with a 550 credit score or higher, you will have a few different financing options available. First of all, you can seek a loan for a basic purchase transaction, which is permissible for up to 100% of the home’s value. If the sales price is lower than the property value, closing costs can be included into the loan amount. With a guarantee fee, the loan-to-value ratio can go as high as 102%.
Rate and term refinancing are also available in a USDA loan with a 550 credit score. This can be used to pay off an existing loan on the property and the new loan can include the payoff balance as well as 2% of the guarantee fee.
Borrowers with credit scores of 550 can also work with the USDA for assistance with a down payment. Down payment assistance is not provided by the USDA, but they do allow you to work with other organizations to fund your down payment. In other words, using down payment assistance will not disqualify you from a USDA loan.
Cash-out refinancing, unfortunately, is not eligible for a USDA loan. However, with the program, you should be able to find a USDA loan with a 550 credit score to fit your specific needs.
Learn More About USDA Loans with a 550 Credit Score
Our service-driven team is ready to help you secure an affordable USDA loan, even if you have a score as low as 550. By taking a common-sense approach to lending, we can increase your chances of loan approval, no matter what your budget, current debt load, or credit score.
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