What is the requirement for a borrower’s credit history concerning major derogatory history?

A borrower is required to provide a plausible explanation for any major derogatory history in their credit report. This requirement acknowledges that borrowers can face extenuating circumstances that affect their credit, such as medical emergencies or job loss. By allowing for explanations, the USDA Rural Housing program assesses the context of the borrower’s credit history rather than simply disqualifying them based on past issues. It recognizes that a past derogatory mark doesn’t necessarily reflect a borrower's current creditworthiness, especially if they have since made changes to improve their financial situation.

Alternative options may suggest that a borrower must have no derogatory history or only show positive history, which could exclude many potential borrowers who have improved since their issues. Similarly, stating that the derogatory items must be cleared for two years does not suit the USDA guidelines, as it does not consider individual circumstances or efforts made after the derogatory event. Overall, the emphasis on a plausible explanation allows for a more comprehensive evaluation of a borrower’s financial behavior and makes homeownership more accessible for those who have faced challenges.