If you plan to purchase a home in a rural area, you may qualify for financing through the U.S. Department of Agriculture. USDA loans provide buyers purchasing homes in eligible rural areas with 100 percent financing – making this an ideal option for first-time home buyers or buyers without the liquid assets to make a down payment. Like traditional mortgage loans, your credit plays a role in whether or not you qualify, so past collection accounts can pose an obstacle to getting your loan approved.
One of the first things your mortgage lender does when you apply for a home loan is pull your credit reports and scores. Collection accounts appear on your credit report when you default on a debt and your creditor sells the unpaid amount to a collection agency. If you did not reliably pay your debts in the past, lenders reason that you're more likely to default in the future – making you a higher risk. Collection accounts also lower your credit scores. Thus, even if you do qualify for a USDA loan, you'll pay a higher interest rate than an individual with an unblemished credit history.
USDA Loan Requirements
Although it is possible to qualify for a USDA loan with collections on your credit report, USDA guidelines state that you must make payment arrangements with the collection agency before it will guarantee your loan. There are, however, exceptions to this rule. If you have had an account converted to collections within the last 12 months, you cannot qualify for a USDA mortgage. You also will not qualify if the collection account is a result of an unpaid debt to the federal government, such as delinquent taxes or a defaulted student loan.
The older a collection account is, the less impact is has on your credit scores until it eventually disappears from your credit reports altogether. According to the Fair Credit Reporting Act, the credit bureaus cannot leave collection accounts on your credit reports for more than seven years. Once the credit bureaus remove a collection account from your credit history, it no longer plays a role in whether or not you qualify for a USDA loan and what interest rate you can expect to pay.
Federal law not only gives you the right to access one free copy of your credit reports each year, it also allows you to contest the information these reports contain. Pulling your credit reports yourself before you apply for a USDA loan ensures that you won't face any unpleasant surprises in the lender's office. Reviewing your credit beforehand also gives you an opportunity to dispute any inaccuracies – such as collection accounts that don't belong to you – before you apply for a USDA mortgage.
- United States Department of Agriculture: USDA Rural Development Single Family Housing Guaranteed Loan Program
- Bank of America: How to Read Your Credit Report
- U.S. Department of Agriculture: Underwriting Guidelines (p.3)
- Daemen College: The Fair Credit Reporting Act (Section 605,611,612/p.28, 63-69, 72)
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