You need credit to get a mortgage, that’s common knowledge. But what if you don’t have a credit score? Will the USDA still consider you for a mortgage?
While it seems odd, you may still be able to get a USDA loan even if you don’t have a credit score. While the USDA and USDA lenders would prefer it if you had a credit score and long credit history, they do offer alternative methods to get the loan that you need.
Proving Your Rental History
If you don’t have a credit score, one of the most important things you need is a rental history. The USDA wants to see that you can responsibly handle a housing payment. Just because it’s not a mortgage and you don’t pay a bank, doesn’t mean that you can’t handle a housing payment.
You’ll need at least a 12-month history of rent payments, but a 24-month history may serve you even better. In order to prove your rental history, you can do one of two things:
- Your landlord can provide a Verification of Rent form. On this form, the landlord verifies the amount of rent that you pay every month as well as the date you paid it. The landlord will also certify that you made your payments on time every month.
- You can provide 12 months of canceled checks for your rent payments. You’ll need to show that you made the payments on time each month with these checks.
Don’t make the mistake of paying your rent in cash or in any other unverifiable form. Lenders want to see concrete proof that you made your payments on time.
Proving Other Credit
You must also prove your other credit history. In other words, you must prove that you can handle other bills outside of your rent. These payments can be anything that doesn’t normally report on the credit report, such as:
- Utility payments
- Insurance payments
- Cell phone bill payments
Any bill that you pay on a regular, monthly basis that you can verify with a canceled check or written proof from the creditor will suffice.
Again, just like your rental history, you’ll need to prove at least a 12-month history of on-time payments with your alternative credit sources.
Proving Compensating Factors
USDA lenders typically also want to see other compensating factors to ensure that you are a good risk if you don’t have a credit score. Compensating factors can be anything that makes your loan application seem less risky. The most common compensating factors include:
- Job stability – If you’ve been at the same job for many years, it can work in your favor. Lenders like to see stability and consistency. If you change jobs frequently, you could pose a higher risk of default. This is because your chances of being unemployed are much greater if you change jobs often rather than if you had the same job for many years.
- Low debt ratios – The less debt you have outstanding at the time of application, the more likely you are to get the mortgage. Lenders want to see that you can comfortably afford the USDA loan without worrying about other debts. While the USDA does allow debt ratios of 29% for your housing ratio and 41% for your total debt ratio, if you have ratios much lower than this, you increase your chances of approval.
- Make a down payment – USDA loans don’t require a down payment. This puts the lender at high risk of default, though. What is going to stop you from walking away from the home if you can’t afford the payments? If you make a down payment, though, you have a vested interest in the home. You may work harder to make sure you can make the payments and avoid default.
- Have reserves on hand – Aside from the down payment, having money set aside in reserves, gives lenders reassurance that you can make your mortgage payments even if your income stopped. Lenders count reserves by determining how many months of mortgage payments the assets cover. The more money you have set aside, the higher your chances of approval become even without a credit score.
The bottom line is that you should have a credit score to get a USDA loan, but it’s not necessary. If you don’t have a credit score, you should see what other ways you can ‘impress’ the lender to convince them to give you a loan. The more positive factors that you can show a lender, the higher your chances of approval become.