The VA loan provides an outstanding, no-down mortgage option. But, VA loan eligibility does not equal lender approval. To be approved for a loan, you must meet a lender’s rigorous financial requirements. As such, we’ll use this article to discuss the minimum credit score for VA loans.
Specifically, we’ll discuss the following:
- VA Loan Overview
- Why Do Credit Scores Matter for Mortgages?
- VA Loan Minimum Credit Score
- Final Thoughts
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VA Loan Overview
Administered by the Department of Veterans Affairs, the VA loan offers eligible borrowers these outstanding terms:
- No down payment required
- No private mortgage insurance (PMI) required
- Low interest rates
- Streamlined refinancing option via the Interest Rate Reduction Refinance Loan (IRRRL)
Unfortunately, though, an eligible borrower may not actually qualify for a loan. As stated, the VA administers the loan program. But, individual VA-approved lenders (e.g. banks, credit unions, and mortgage companies) actually originate and service VA loans. Accordingly, to qualify for a VA loan, borrowers must meet two sets of criteria: 1) VA military service requirements, and 2) lender financial requirements.
And, these lender-specific requirements typically include minimum credit scores.
Why Do Credit Scores Matter for Mortgages?
What Is a Credit Score?
Your credit score is a number between 350 and 850 that defines your creditworthiness, that is, how likely you are to repay debt. Higher scores indicate higher creditworthiness, whereas a lower score means that you are a more unreliable borrower. Technically, this three-digit score is known as a FICO (Fair Isaac Corporation) score, and three major credit agencies (Experian, Equifax, and Transunion) generate these scores based on several factors, including:
- Your payment history (e.g. credit card and loan payments)
- The total amount of money you owe
- Length of credit history (i.e. when you opened your first credit account)
- Types of credit you have
- Frequency of new credit inquiries and accounts
Of the above factors, payment history plays the largest role in determining your credit score. That is, do you make your payments on time, or have you had some late payments? According to a CNBC study, payment history makes up 35% of your total credit score calculation.
Most lenders and credit agencies divide borrowers into the following tiers:
- Exceptional: 800 – 850
- Very good: 740 – 799
- Good: 670 – 739
- Fair: 580 – 669
- Poor: 300 – 579
Why Do Credit Scores Matter for Mortgages?
Credit scores affect mortgages in two primary ways. First, to qualify for a mortgage, lenders normally require a minimum credit score. As stated, these three-digit scores provide an overview of your reliability as a borrower. If you have a particularly low credit score, lenders will assume you are an unreliable borrower. By extension, they won’t want to lend you hundreds of thousands of dollars for a home mortgage, worrying you won’t repay.
Even when you do qualify for a mortgage, your credit score still matters. Generally speaking, the higher your credit score, the lower the interest rate you will receive. For example, say you take out a $250,000 VA loan to purchase a home. With a score of 780 (“very good”) you’ll likely qualify for the best rate, let’s say 2.5%. But, if your credit score drops 100 points to 680 (“good”), that rate could jump to 3.0%. This 0.5% increase translates to over $24,000 in extra interest payments over the life of a 30-year mortgage!
VA Loan Minimum Credit Score
What is the Minimum Credit Score for a VA Loan?
The VA does not impose a minimum credit score for VA loans. According to Department of Veterans Affairs guidance on VA loans: There is no minimum credit score requirement. Instead, VA requires a lender to review the entire loan profile. In other words, the VA wants lenders to look at all of a loan applicant’s qualifications, not just credit scores (e.g. debt-to-income ratio, employment status/history, assets, etc.).
Individual Lender Requirements
Despite this VA flexibility, many individual lenders do impose a minimum credit score requirement on VA loans. Generally speaking, lenders will require minimum credit scores of 580 to 620 to qualify for a VA loan.
Fortunately, though, alternatives exist. If a borrower has sufficient residual income, some lenders will even approve VA loans with credit scores as low as 500. However, finding one of these lenders can be challenging. Typically, lenders use a process known as automated underwriting when they review your VA loan application. This process uses software to largely automate the approval process.
Normally, a credit score of 500 will trigger a disapproval with an automated underwriting system. But, if lenders are willing to use a manual underwriting system (i.e. “do it by hand”), they may be able to include enough amplifying financial information to qualify a borrower for a VA loan. Not many VA-approved lenders offer manual underwriting. But, if you have a particularly low credit score, you may need to seek one out to qualify for a VA loan.
Ways to Improve Your Credit Score
If you can’t find a lender willing to complete this manual underwriting, you can also take the following steps to improve your credit score. While it won’t skyrocket overnight, doing the following will steadily improve your credit score to a point that it will qualify for a VA loan:
- Make all payments on time: As stated above, payment history plays the absolute largest role in determining your credit score. By making your loan and credit card payments on time, you will gradually improve your credit score. Conversely, one late payment can significantly lower your score. To avoid accidental late payments, you may want to consider setting up automatic payment plans.
- Maintain low credit card balances: Credit utilization serves as another major factor in your credit score. That is, of your available credit, how much do you actually use? Say, for instance, you have a $20,000 credit card limit. An average balance of $2,000 translates to 10% credit utilization ($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.
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 580 to 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 to have the best chances of A) qualifying for a VA loan, and B) securing the best interest rate.
Maurice “Chipp” Naylon spent nine years as an infantry officer in the Marine Corps. He is currently a licensed CPA specializing in real estate development and accounting.
