How To Get Approved For A USDA Loan With A 580 Credit Score

Getting approved for a mortgage can be challenging, especially if you have less-than-perfect credit. However, there are still financing options available even if your credit score is on the lower side. One option to consider is a United States Department of Agriculture (USDA) home loan.

USDA loans are backed by the federal government and were created to help low-to-moderate income borrowers in rural areas purchase a home These loans offer flexible credit requirements, low interest rates, and require no down payment.

In this article, we’ll explain everything you need to know about getting a USDA loan with a 580 credit score

What is the Minimum Credit Score for a USDA Loan?

The USDA itself does not set a minimum credit score requirement for its home loans. Instead, each individual lender sets their own minimum score.

Most lenders prefer applicants to have a credit score of at least 620 to qualify for automated underwriting approval. However, the good news is that having a score below 620 does not automatically disqualify you from a USDA loan.

Lenders can still manually underwrite your application if you have a score between 580-619. While not ideal, it’s still possible to get USDA financing approved with a 580 FICO score or lower if you have positive compensating factors.

Why Do Lenders Prefer a 640 Credit Score?

You may notice some lenders listing 640 as their minimum credit score for USDA financing. This is because a score of 640 or higher allows the lender to process your application through an automated underwriting system called the Guaranteed Underwriting System (GUS).

GUS analyzes your credit report and other application details to generate a recommendation of your loan eligibility and risk level as a borrower. When your credit score is 640 or above and you have a clean credit history, you’re more likely to receive an “Accept” recommendation from GUS.

An “Accept” finding enables the lender to approve your USDA loan application quickly without extensive manual review. However, GUS approval is not required. The lender can still underwrite your application by hand if needed.

Tips for Getting Approved with a 580 Credit Score

While getting USDA-approved with a sub-620 score takes some extra work, it is possible with the right strategy. Here are some tips that can help strengthen your application:

• Highlight stable income: Underwriters want to see you have reliable income to make your mortgage payments. Provide recent pay stubs, bank statements, and tax returns documenting your income. Having 2+ years at the same employer is ideal.

• Minimize debts: The lower your recurring debts, the better. Pay down credit cards and loans as much as possible prior to applying.

• Explain past credit issues: If you have late payments or other delinquencies on your report, write a letter explaining the circumstances that led to them and why they are no longer an issue. For example, highlighting a past medical crisis or job loss that has since been resolved can help provide context.

• Make a larger down payment: While USDA loans don’t require a down payment, putting at least 3-5% down shows your commitment to the home. Underwriters like to see your own “skin in the game.”

• Have ample reserves: Having 6-12 months’ worth of mortgage payments available in your bank account makes approval much more likely. Money in reserves reduces the risk that you’ll default on the loan.

• Bring on a co-signer: Asking a family member or friend with strong credit to co-sign the mortgage with you can give your application a significant boost. Their income, assets, and credit will be factored in by underwriters.

• Apply with several lenders: Each lender has their own unique underwriting guidelines. Shopping around with multiple lenders maximizes your chances of approval.

• Get pre-qualified: Going through the pre-qualification process first allows the lender to review your application upfront and advise if you need to take steps to strengthen your file before formally applying.

How Non-Traditional Credit Works with USDA Loans

If you have limited established credit history, USDA program guidelines allow lenders to consider non-traditional credit references.

Non-traditional credit includes any payments that demonstrate your ability to meet financial obligations, including:

• Rent payments
• Utilities like electricity, gas, phone, etc.
• Insurance coverage (auto, life, medical, renters)
• Child care, school tuition
• Cell phone bills
• Car lease or loan payments
• Retail credit accounts (department store cards)

To use non-traditional credit, you must prove timely payments for at least 12 consecutive months. Provide documentation like statements, receipts, and letters from the creditor verifying your payment history.

Which Mortgage Lenders Offer USDA Loans to 580 Credit Scores?

Many national lenders and community banks now offer USDA financing. Your local options will vary based on your state and region.

We recommend researching multiple lenders to compare interest rates and underwriting requirements. Here are some of the top national lenders known to work with lower credit scores:

Fairway Independent Mortgage – Approves 580 credit scores on USDA loans with compensating factors. Also offers credit repair programs.

Guild Mortgage – May approve 580+ scores case-by-case with manual underwriting. Wide availability nationwide.

Freedom Mortgage – Allows non-traditional credit on USDA loans. Offers 580 score financing in many cases.

Veterans United – Pre-qualifies borrowers with 580+ scores for USDA loans. Approval requires strong compensating factors.

New American Funding – Manual underwriting for borrowers with 580 credit scores. Examines the full financial picture.

Ruoff Mortgage – Advertises USDA loans for borrowers with 580 credit scores. Approval depends on other application factors.

It’s wise to get pre-qualified with multiple lenders and compare. This allows you to address any potential issues on your credit report or application upfront.

Sample USDA Payment at a 580 Credit Score

Note: The figures below are hypothetical and for illustration purposes only.

Let’s say you get approved for a $250,000 30-year USDA loan at a 580 credit score with a 4.5% interest rate. Here is an estimate of what your monthly mortgage payment would look like:

Loan Amount: $250,000

Interest Rate: 4.5%

Term: 30-year

Principal & Interest Payment: $1,208

Property Taxes (est.): $300

Homeowners Insurance: $125

Mortgage Insurance: $0 (No MI required on USDA loans)

Estimated Total Payment: $1,633 per month

As you can see, USDA loans offer very affordable monthly payments, making homeownership possible even with less-than-perfect credit.

Next Steps to Take

If your credit score is around 580 and you’re interested in a USDA mortgage, here are some suggested next steps:

• Review your credit reports and address any errors dragging down your scores.

• Research USDA lenders and their minimum score requirements. Identify lenders willing to manually underwrite 580 credit scores.

• Get pre-qualified to see your preliminary eligibility and identify any areas that need improvement.

• Take steps to boost your credit score and down payment savings before formally applying.

• Gather all required income, tax, and asset documents the lender will need to review your application.

• Highlight factors that help compensate for your lower credit score, such as a strong down payment, ample cash reserves, or a co-signer.

• Apply with multiple lenders to increase your chances of approval. Be prepared to provide explanations for any past credit issues.

While it takes some extra effort, homeownership is possible even with less-than-perfect credit by leveraging a USDA loan. With the right lender and an application showcasing your ability to repay, you can be approved with a 580 credit score or lower.