Most USDA loans today require for a minimum credit score of 620 for approval. While that number isn’t a universal guideline most lenders and banks require this minimum. Some may even require a slightly higher score of a 640. That said, you may be curious how the credit score numbers are calculated and why lenders use the score they do and why they ignore other reported scores. To get a better understanding regarding jumbo loans and credit scores, let’s do a little more research together to see how credit scores are calculated.
Credit scores have five basic components with each contributing its own share to the final number. Credit scores range from 300 to 850 with the higher score representing better credit. USDA lenders today use scores provide by the FICO, which developed the original algorithm lenders use today. The five components are:
- Payment history 35%
- Available credit 30%
- Length of credit history 15%
- Types of credit 10%
- Credit inquiries 10%
Payment history which carries the most weight when scores are calculated looks at payment history. If a payment is shown to have been made more than 30 days past the due date, scores will fall. If payments are made on time and not 30 days past the due date, scores will improve. Because this category makes up 35% of the score, just one payment made more than 30 days past the scheduled due date, scores can fall rather quickly. If no more late payments are made then scores will gradually begin to improve yet not as quickly as they do when scores fall.
Available credit takes into account existing loan balances and credit lines. When borrowers keep a small balance compared to their available credit, this category accounting for 30% of the score raises credit scores. On the other hand, when consumers keep a relatively high balance compared to a line of credit scores will begin to deteriorate. For example, if a line of credit is $10,000 and the outstanding loan balance is $3,000 scores will improve. If the outstanding balance is say $9,500 scores will fall. The closer the balance gets to the limit the more the scores will drop and drop even further should the balance exceed, even temporarily, the credit line.
The length of credit history awards consumers the longer they have used credit. There really isn’t anything a consumer can do to affect this score as it is affected with passing time. The types of credit used mean a varied mix of credit including revolving and installment loans. Scores can also degrade for certain types of loans from finance companies for example. The final category carrying 10% of the score is reserved for credit inquiries of new credit. When a consumer applies for new credit scores will dip slightly. If that consumer applies for multiple credit accounts over a very short period of time scores will be negatively affected.
There are three primary credit repositories, Experian, Equifax and TransUnion and all three use the same FICO algorithm. Yet because there are differences in reporting dates and methods by merchants and businesses these three scores will be similar but very rarely exactly the same. For example, when a lender requests a credit report and credit scores, they might see something like
- 750 Experian
- 744 Equifax
- 755 TransUnion
Because there are three, the lender will throw out the highest and lowest score, using the middle one. If there are two borrowers on the same USDA mortgage application, the lender will typically use the lowest middle score.
It’s important to note that while you can get your own credit score at multiple online sites, understand that the credit score you see won’t necessarily be the same scoring model your lender requests. Don’t be surprised to see slight score differences as the scoring model the lenders use can be different. You can have a pretty good idea of what your scores will be but your mortgage lender will have the qualifying one.
USDA Rural Housing 100% home financing is a great way for eligible first-time buyers to move into a home with little cash out of pocket. Buyers that have questions can call 800-691-8826 or just submit the Quick Contact form on this page. Also be sure to learn more about USDA Loan Eligibility here.