Peter Van Brady
Founder of SoCal VA Homes
Author: Avoiding Mistakes & Crushing Your Deals Using Your VA Loan
In this extensive guide about VA loan credit scores, we’ll cover every topic you could be curious about! We’ll cover the minimum credit score for a VA loan and all the VA home loan credit score requirements.
But we won’t just discuss the credit score needed for a VA loan, we’ll go much deeper in the topic, looking at how bankruptcies, judgements, foreclosures and other blemishes affect your credit score for a VA loan.
Finally, we’ll put your mind at ease…”Don’t cry over your credit,” we like to say. Often our clients can get approved for a VA loan with limited credit or even get a VA home loan with a 550 credit score or lower.
Ready? Let’s dive in!
One of the many perks of buying a home as a Veteran is the flexibility surrounding your credit history. While many lenders are hesitant to extend mortgages to those with a history of bankruptcies, foreclosures and bad credit, VA home loans are guaranteed by the government. This government loan can provide very lenient VA loan credit score requirements.
Though the loans themselves are offered by private lenders, this government guaranty provides default risk assurance to the lender. Ultimately, it is the Veteran who benefits most from this program – as it should be. Those curious about the credit score needed for a VA home loan can breathe a sigh of relief when they learn just how flexible most lenders can be.
In order to qualify for a loan, a Veteran’s credit scores will be pulled, and a review focused on account activity in the last 12 months will be established, anticipating a limited amount of derogatory credit information.
Many Veterans are surprised to learn that the Depart of Veterans Affairs does not set a minimum credit score for VA loan. Generally speaking, those with at least a 620 FICO ® score will qualify for a VA home loan. Because the VA doesn’t directly make loans, they only provide the VA Guaranty to lenders, the lenders individually establish their own lowest credit score for a VA loan.
Your credit score for a VA loan is NOT as important as you may think when buying a home!
Intuitively, you may be thinking why credit scores are important!
And you may be thinking that your credit scores may disqualify you from getting VA financing for your home purchase. Or you may be thinking you want to improve your credit to “get a better rate.” If so, you are not alone.
The following discussion should put you at ease and keep you from crying about your credit scores!
SoCal VA Homes is an innovator in the VA home ownership processes and programs. We do not want you to worry about your credit score for a VA loan!
Surprisingly, your credit score may not be nearly as important as you might think, especially as it relates to VA financing. Many people are uncomfortable with the idea of a credit score. It sometimes feels like the adult version of being graded in school. For some, a credit score is like an invisible force hovering out there somewhere just waiting to judge you and destroy your plans!
But credit scores are merely a way for lending institutions to try and predict future behavior. Credit scores are an attempt to create, via statistics, a magic crystal ball of sorts to gauge your ability to repay a loan.
Your credit report contains lots of information including:
- Credit risk scores, typically from Fair Isaac Co. – “FICO” scores.
- The consistency of how you pay your bills.
- Which bills you’ve missed or paid late.
- The types of credit that you applied for (inquiries regarding mortgage loans, auto loans, consumer financing, installment payments, revolving credit).
- Your payment history on each type of loan including the capacity or limit of a particular piece of revolving credit, as well as how much outstanding balance you have relative to that limit.
- Any current debt amount you may hold.
- Who you are paying.
- When the account was opened.
- Whether it is still open.
- Whether you have any delinquencies.
- Whether the delinquencies are 30 days late, 60 days late, or 90 days late.
- When the late payments occurred.
- Whether you’ve gone into foreclosure on a particular mortgage.
- Whether the account is current now.
- Whether it’s joint with you and your spouse.
- If it is an individual account.
- Any judgments or levies filed against you.
- Bankruptcies.
This very personal information is gathered by the major credit bureaus and then sold in formatted packages—primarily a credit report—to companies who (hopefully) want to extend you credit (such as an auto lender, mortgage company or a credit card company.) In short, your credit score seems to include most all of your personal information except your shoe size.
The Credit Risk Score was developed by Fair Isaac and Company (FICO) to assist financial companies in assessing risk. It may or may not bother some people to learn that Fair Isaac and Company is a private, for-profit company, not a governmental oversight department.
There are two government agencies who provide oversight for credit bureaus: the Federal Trade Commission (FTC) and the COC (Comptroller of the Currency). Still, it may be jarring for some to know your personal data, your score, is purchased by a company in order to make a decision whether or not to issue you credit. Typically, lenders (and credit agencies who provide aggregated credit reports to lenders) subscribe to the three main national credit bureaus, which are:
Equifax (1-800-685-1111)
Experian (1-888-397-3742)
TransUnion (1-800-680-7289)
Everything that is reported gets crunched through a formula by the bureaus, to produce your score(s). We assume at this point that some readers have gone sheet-white over the fact that your personal details are given the “Big Brother” treatment. You might also have paled from sheer stress, wondering what “number” you are given by the software analytic powers that be.
STOP WORRYING!
As stated before, active military and Veterans have a specific advantage: VA financing criteria is really, really liberal in terms of the “credit quality” that VA underwriters will accept. The reason for their liberal credit underwriting guidelines is because the VA underwriters and their lenders have the backstop of the VA Guaranty—insuring up to 25% of the loan balance, backed by the U.S. government.
This allows VA loan underwriters to accommodate VA loan credit scores that conventional guidelines would often deem too low. FICO scores range from 300 to 850, and conventional loan underwriting prefers credit risk scores of 700 or better. Yet, with the VA Guaranty of 25% of the loan balance - the government-backed insurance pool – much lower scores, as low as 500 might be considered.
The bottom line is, if you have marginal credit…in the “fair range,” YOU CAN LIKELY STILL BUY A HOME!
If you think you simply have bad credit, you may still be shocked to realize that you can get approved! Please find out more about VA loans with bad credit.
If you have run your credit and you don't have enough credit tradelines, there are simple solutions. Consider alternative credit tradelines.
Given this VA advantage, you can reconsider your credit scores for a VA loan. Is it really important to have high scores? In terms of qualifying for VA financing, the answer is No!
Don’t Put off Searching for a Home Because you Think Your Scores Are Too Low!
If you have previously determined to hold off from trying to buy a house because you thought your credit needs to improve, then you simply haven’t properly evaluated your situation. There is hope!
That doesn’t mean your credit report (a document that shows your credit history and scores) can be a disaster (e.g., you can’t have a credit history filled with charge-offs, delinquencies and collection accounts and expect to be approved for a loan.) You need to work to keep your financial house in order. But if you had, for example, a bankruptcy or a life event such as an illness, and you resurrected yourself from all your crises and saved your credit profile, you are likely still able to get a VA loan approved.
Let’s explain this concept with some numbers.
(We’ll keep the Wall Street gibberish to a minimum.) Say a person with a credit risk score of 600 is offered a rate that would be approximately 3/16th higher than a borrower who had “superior credit” or a 740 score. Well, 3/16th isn’t even ¼ of 1%. (It’s just slightly higher than 1/8th.) And someone who had credit risk scores between 620 and 660 might be offered a rate that is 1/8th of 1% higher than someone who had superior credit risk scores of 720 or higher. Both of these lower credit risk score profiles are getting offered pretty good rates, all things considered.
Such is the difference between loan offers for lower credit scores, with the involvement of the VA Guaranty. Got a credit risk score of 600? That’s not a great score but you can still get a good loan, thanks to your service and the VA Guaranty. The VA Guaranty, facilitated by the “VA Funding Fee,” the money that goes into the “Guaranty pool” is the huge benefit that makes the whole thing work.
The reason we are telling you about the importance (or lack thereof) of credit score is to give the you, the VA buyer, a more complete picture of what you are up against…and where you can catch a break. People may be discouraged by their credit score and think that they need to improve it before they can pursue homeownership.
If you are holding off trying to buy a house because you think your credit needs to improve, you may be shooting yourself in the foot! VA financing is likely already available to you with competitive rates. Those thoughts that your credit needs to be better are more applicable to conventional underwriting on conventional loans.
Here is where the VA Guaranty comes in, which is your green light to pursue a loan and ultimately own a home, regardless of your credit score. Let’s say you decide to wait for the perfect moment when you have improved your credit score to a traditionally good score of 700+.
Okay, but what if during that time of improving your credit, interest rates rise 1% and prices go up 10%? Your ability to afford a property is dramatically affected, and the payment for the same house is now approximately 23% higher. The chance to purchase that house may just have slipped through your fingers. Big mistake!
The VA Guaranty is the lender’s “risk adjustor” that allows them to take a risk on you. Statistically, VA loans default at a rate much higher that of their conventional loan counterparts. The VA Guaranty of 25% dramatically reduces the lender’s risk of loss, in the same manner that a 20%-25% down payment reduces the risk for the conventional lender. Essentially, the VA Guaranty absorbs the risk that is comparable to the typical down payment. Advantage Veteran! Don’t make your credit blemishes an excuse to defer considering purchasing a home. Again, that would be a mistake.
Hopefully you now understand why we CAN make the statement, “Credit scores are NOT that important!” They have only a marginal effect on the rates available to VA loan applicants. Because the VA program is the lending marketplace’s credit risk equalizer, it eliminates the necessity of superior credit that is required for conventional financing.
As Seen on ABC 10 5:00 O’Clock News
Sgt. Will Bauer (U.S.M.C.), Foothill Ranch, CA
As Seen On ABC 10 News
U.S. Army Veteran Billy Mayberry and Debbie Mayberry, Quartz Hill, CA
