VA Loan Credit Requirements
Even though the VA loan program is much more forgiving than conventional mortgage programs, many lenders still have credit requirements in place for VA loans. Most banks require a minimum 620 credit score, 12 months mortgage history with no late payments, and if you are a first-time homebuyer, you may be required to verify timely rental payments. Let’s delve a little deeper into the credit requirements for VA loans and what your credit score means for you.
Minimum Credit Score Requirements
The Department of Veterans Affairs only guarantees loans, they don’t actually fund them. That being said, it’s important to make the distinction between the rules that the VA has in place for VA home loans and the rules that VA lenders add. When it comes to credit, the VA itself doesn’t have any minimum credit score requirements at all. However, lenders can add their own rules (called overlays). Most lenders will ask for a credit score that is 620 or higher. At Low VA Rates, we do not add any overlays, meaning we also don’t have any credit score requirements. That doesn’t mean we don’t take credit score into account, because we do, but we will not turn any borrower away solely because of their FICO. We frequently do loans for homeowners with less-than-perfect credit scores.
Your credit score will also determine the type of rates you get. If your score is lower, you’ll likely get a higher interest rate to cover the risk you bring to the table. If your score is higher, you’ll likely get a lower interest rate. Saving money on interest is a huge part of the reason why it’s so important to maintain good financial habits to boost your credit score as much as possible over time.
VA Credit Score Requirements Compared to Other Loans
We know that most VA lenders ask for a FICO of 620 or higher, but how does this compare to other loans? Is this requirement high or low comparatively? Would it be easier to qualify for other loans? FHA loans have similar requirements, and most FHA lenders have a 620 minimum. USDA loans, however, are slightly higher with credit scores of 660 and higher. And conventional loans generally come with the highest credit requirements of all. Scores less than 740 will usually come with additional high fees and potential rejections on conventional loans.
Based off of these minimum requirements, it’s pretty easy to see that the VA home loan program is one of the easiest to qualify for as far as credit is concerned. With other loans, the credit requirements are much higher, and even if some let you finance your home with a loan through them, they will tack on extra fees because of the additional risk that comes with a lower credit score.
What Does Your Credit Score Say about You?
If you lent your friend $50, you would want to know that your friend is going to pay you back eventually. Lenders, bankers, renters, and anyone else who deals with large payments of money are in that same situation. So, they need a system to determine which borrowers are most likely to repay the debt they owe. This is where credits scores are so handy. To the borrower, credit scores may feel like an unfair representation of who they are as a person, but credits scores do give lenders a general idea of how you manage your debt. Your FICO factors your length of credit history, lines of new credit, credit mix, credit utilization, and payment history. All of these items together demonstrate how responsible you are with different lines of credit and how dependent you are on those debts.
Types of Credit Score
There are three main credit bureaus: Experian, Equifax, and TransUnion. They all have slightly different methods for how they calculate your credit score. Because of this, you score will likely differ slightly between the three, but there’s not so much variance that using one score over another would hurt or help you. Each bureau also has a different score range. Most run from 300 to 850 (300 being the worst and 850 being the best), but Experian runs from 330 to 830. Since this is a fairly wide range, credit scores are also broken up into value categories. This is how the ratings are generally categorized:
550 and below = Bad
550 - 649 = Poor
650 - 699 = Fair
700 - 749 = Good
750 and above = Excellent
Keep in mind, however, that every creditor sees these scores a little differently. Some may consider an excellent score to be anything 720 and higher.
How to Boost Your Credit
There are a few ways that have been proved to boost your credit score and keep it high. The biggest challenge in following these methods is that boosting credit takes years of good financial habits. For some borrowers, keeping up the good habits over time feels nearly impossible to accomplish. However, if you stick to a few rules and set periodic reminders for yourself, you can easily follow these few credit tips:
Make all your payments on time.
Pay off your debts as soon as you can.
Do not open multiple lines of credit all at once.
Keep your credit card balances low.
Periodically check your credit report for inaccuracies.
If you simply don’t have a credit history established (which can happen for a variety of reasons), you can start establishing your credit by taking out a credit card. Like is mentioned above, you do not want to open multiple lines of credit at once as this will bring your score down rather than up. Try getting just one credit card to start. Even if you don’t have a credit history, you can usually qualify for some type of credit card. When you have that card, maintain the good financial habits listed above, and then take on more credit when it is necessary to do so.
Payment History Factor
Payment history is an important factor in getting approved for a VA loan. Your rental and mortgage payment history signify your ability to pay your housing payment and will better qualify you for a VA loan. Payment history is the most important factor in your credit report as it accounts for about 35 percent of your score. In order to boost your payment history, you should maintain good payment habits. Be sure to always make payments on time, and remember that defaulting on a larger loan will hurt your credit more than defaulting on a smaller one.
If you lack credit history, provide explanations for any of the following:
You are a veteran who has been recently discharged and has not been able to establish credit.
You use cash instead of credit on a regular basis for paying bills and purchases.
You are a veteran who has not used credit since reconciliation of bankruptcy and judgments.
Bankruptcy is not removed from your credit report for 7 years, but bankruptcy does not immediately disqualify a veteran who is applying for a VA loan. Here at Low VA Rates, we strongly suggest speaking directly with one of our approved VA lenders regardless of what you have been told regarding bankruptcy in the past. If 2 years have passed since you have had a bankruptcy discharged, you should still apply for a VA loan because it will not be considered by many lenders. If the bankruptcy discharge was within 1 to 2 years of applying for a VA loan, a couple of things will be taken into consideration that may still help qualify a veteran:
If you have obtained credit following the bankruptcy and made satisfactory timely payments
If reasons for bankruptcy were above and beyond the control of the veteran: loss of job, medical bills, divorce, loss of a business, etc.
Foreclosure is still another issue that will be a deciding factor in qualifying a veteran for a VA loan. The same rules apply as did with bankruptcy, but if the foreclosure is on a VA loan, that may change the amount of entitlement available to be used. In this case, you must have your VA entitlement redeemed or else deal with paying more on your loan.
Do You Meet Requirements?
If you do meet all of the credit requirements for most VA lenders, great! Apply now for a VA loan and you could save large amounts on your mortgage. However, keep in mind that you and your house must meet other requirements as well in order for you to fund your home with a VA loan. Just a few of these requirements include a Certificate of Eligibility (COE), a debt-to-income (DTI) ratio of 41 percent or less, and acceptable residual income. If you do not meet requirements but would like to finance your home with a VA loan, give us a call today. We can help you determine eligibility and help guide you to become eligible. Don’t wait to save money on your home mortgage. Get started now!