VA Loans and Credit: 2023 VA Minimum Credit Score Requirements

Credit scores play a significant role when getting a mortgage. Not only do credit scores factor into your rate and loan terms, but they also play a role in determining overall eligibility.

Fortunately for VA borrowers, one of the advantages of VA loans is that they have more relaxed credit score requirements compared to conventional loans. Here we look at VA loan credit score requirements, what you can expect from the program and how credit scores impact VA loan eligibility.

VA Loan Minimum Credit Score

The Department of Veterans Affairs (VA) does not set a hard number on credit scores. Instead, the VA leaves credit determination to the lender. VA lenders typically require a 620 minimum credit score, though some may go as low as 580.

The 620 minimum credit score is not just an arbitrary number. It comes from how mortgages are bought and sold after closing. Private lenders and banks often sell their mortgages to government-sponsored enterprises (GSEs), such as Fannie Mae and Freddie Mac, to free up capital and continue providing mortgages to other borrowers. GSEs currently own more than 60% of all U.S. residential mortgages.

GSEs buy mortgages in “pools” or groups and have credit score requirements for what they purchase. GSEs like Fannie Mae typically require mortgages in their pools to all have a 620 minimum FICO score, which is how many mortgage companies set their credit score requirements.

VA Loans with a Low Credit Score

If you have a low credit score, getting a VA loan is still possible but may come with hurdles. You can read about VA loans and bad credit here, but here’s a quick overview.

Manual Underwriting with Low Credit

The first thing to consider is that your loan may require a manual underwrite.

When borrowers apply for a VA loan, their information is input into the Automated Underwriting System (AUS). AUS is a computer model that analyzes the borrower’s financial information, such as credit scores, income and debt levels, to determine if they qualify for a VA loan and meet the VA’s lending guidelines. 

The system can generate a decision within minutes, streamlining the loan approval process. Based on the AUS findings, the lender may approve, deny or require manual underwriting for the application.

Borrowers with lower credit scores often require manual underwriting. Manual underwriting is the process of evaluating a loan application when AUS does not provide a clear decision. In manual underwriting, a human underwriter carefully reviews the borrower’s financial information and assesses their ability to repay the loan. A manual underwrite is more time-consuming and typically comes with additional requirements.

Additional Requirements

Borrowers requiring a manual underwrite often face additional requirements to offset risk. In these cases, it’s not uncommon for the lender to require things like:

• A lower cap on the allowable debt-to-income (DTI) ratio: The allowable DTI can exceed 55% for borrowers with sterling credit. However, for those with less than a 620 FICO, their allowable DTI is often capped at 45 or 50%, depending on the lender.
• Additional cash reserves: Your lender may require cash reserves (savings) to cover anywhere from 3 to 12 months of mortgage payments.
• 24 months of on-time rental payments: It’s also possible your lender requires verification of rent, where they need you to show 24 consecutive months of on-time rental payments.

Remember, requirements and guidelines vary by lender. It’s often a good idea to shop around with lower credit to ensure you receive the best terms.

Can I get a VA Loan with a 500 Credit Score?

With the thought of a manual underwrite, you may wonder how low a VA lender is willing to go. 

With the VA not having a minimum credit score, getting a VA loan with a 500 credit score is theoretically possible. However, finding a lender willing to go that low may be difficult.

With credit in the 500s and below, prospective borrowers should look deeply at their finances and determine if they can truly afford a mortgage. If a borrower consistently misses payments, it’s probably not a good idea. Individuals who do not have a credit history can take steps to establish credit and with patience, increase their chances of being approved for a loan in the future.

Improving Credit to Meet Lender Benchmarks

Building credit to meet a lender’s credit score minimum requires time, patience and responsible financial habits. Some VA lenders may be willing to help guide borrowers in their credit-building journey. However, those with lower credit can also take the below steps to improve their credit score.

1. Check credit reports: Obtain a free credit report from each of the three major credit bureaus (Equifax, Experian and TransUnion) through AnnualCreditReport.com. Review the reports for accuracy and dispute any errors or inaccuracies.
2. Pay bills on time: Consistently paying bills on time is crucial, as payment history accounts for around 35% of the credit score. Set up payment reminders or automatic payments to avoid missing any due dates.
3. Reduce credit card balances: Aim to keep credit card balances low and maintain a low credit utilization rate (the percentage of available credit being used). Ideally, the utilization rate should be below 30%. For example, if you have a $20,000 credit card limit, an average balance of $2,000 translates to a 10% credit utilization rate ($2,000 / $20,000). Credit reporting agencies generally want to see credit utilization rates below 30%. But, the individuals with the best credit scores typically have utilization rates in the single digits.
4. Establish a credit history: If someone has no credit history or a limited credit file, they can consider applying for a secured credit card, which requires a refundable deposit. Alternatively, they can become an authorized user on a family member’s or friend’s credit card account, as long as the account has a good payment history and low credit utilization.
5. Avoid closing old accounts: Keep old credit accounts open, as they contribute to the length of credit history, which impacts the credit score. However, if the account has high fees or the temptation to overspend is too great, it may be best to close it.

While your FICO score typically doesn’t skyrocket overnight, doing the above can help improve your score and chances of getting a VA loan.

Final Thoughts

While the Department of Veterans Affairs doesn’t impose a minimum credit score for VA loans, many individual lenders require scores of at least 620. Finding a lender to approve a VA loan with a lower score is possible – but challenging. Instead, borrowers should focus on gradually improving their credit scores or work with a lender who can help guide them in their credit journey.