The lower the down payment required for a buyer, the more risk a lender takes. It would seem like a VA home loan requiring no down payment would have really strict guidelines, probably even requiring perfect credit scores, too. Right?
Actually, a VA home loan credit score requirement can be pretty lenient. Now, it does not mean approving a loan with all collections. But, it does mean that credit scores even as low as 600 could receive a VA loan approval. This means buying a home as a military first-time home buyer can include some wonderful VA benefits, including the possibility of using a VA loan for a second home (which could mean having multiple VA loans at once.)
Besides having leniency on credit scores, VA home loans offer very affordable monthly payments because of great interest rates, as well as no monthly mortgage insurance. Furthermore, they offer flexible underwriting guidelines when it comes to debt-to-income ratios, time after a foreclosure or short sale, and seller concession assistance.
What is a Good VA Home Loan Credit Score?
First of all, there really isn’t a VA credit score, although there are VA lender guidelines which set restrictions on who can get a VA loan approval.
So, what is a good credit score and what makes it go up or down? Typically, hearing a VA credit score requirement means looking at the middle of three credit scores.
VA lenders pull a merged report including credit files from Equifax, Transunion, and Experian. Then, they use the middle of the 3 scores. If there are only two scores because of limited credit, the lower of two scores is used. In the case of only one score, that score is used. Usually, VA buyers have a better chance of loan approval with 3 scores, but approval with one score is certainly possible.
What Affects a VA Home Loan Credit Score?
When calculating a credit score, there’s really not a set point scale. Meaning, each inquiry or late payment is not 5 points. How much a credit score goes up or down depends on the overall mix of a person’s credit file. First of all, let’s get out of the way examples that do NOT affect your credit score
Your Credit Score is Not Determined By…
- Spouse (unless you cosigned on debts)
- Social media
- Assets or wealth (Low-income borrowers can have as high of a score as a person with higher income)
- Where you live
- Employment position
Here are the 5 Major Factors That Do Affect Your Credit Scores!
- 35% = Payment history on accounts
- 30% = Balance compared to credit limits on revolving accounts
- 15% = Length of credit
- 10% = Type of credit
- 10% = New credit
The one that surprises most is the second factor. Balances on credit cards and lines of credit are just about as important as not paying bills on time! Therefore, the fastest way to increase (or decrease) a VA home loan credit score is to pay down credit card balances.
A key point to remember is that it’s not the balances alone. It is the balance compared to the credit limit as a percentage. Thus, a $500 balance on a $5000 card limit is good because it is only 10% of the limit. Although, a $500 balance on a $500 credit limit will tank a credit score.
But, remember the other factors. Even though the other factors are small, scores will be swayed by too many inquiries (especially, watch out for the holidays!), credit mix, and how long credit has been established.
How to Improve Your Chances of VA Loan Approval With a Lower Credit Score
Of course, VA buyers with an 800 credit score should be well qualified assuming everything else is in line. Even 680, 700, or higher credit scores have great chances of getting a VA loan approval. But, as the VA home loan credit score goes down, it helps to have compensating factors. Compensating factors may offset the negative of a lower score.
VA Loan Compensating Factors
- On-time mortgage or rent history
- Low-to-no payment shock
- Assets (banking and retirement accounts)
- Low debt-to-income ratio
- Down payment (usually not required, but making a down payment has benefits)
- Residual income (money left over after the monthly bills are paid)
VA loans start off by being run through automated underwriting systems, so credit scores and these factors weigh heavily in the VA loan preapproval.
As you probably have guessed, the higher the credit score, the easier the approval.
By combining one or more of the above characteristics with a lower credit score, buyers may still come out with an approval- and more importantly, with a home!
Even buyers with a 600 credit score with other factors could get a no-money-down loan and enjoy the benefits VA borrowers get to enjoy. With enough factors, going below a 600 score may even be a possibility.
So, be all you can be when it comes to your credit score for a VA loan (and, really, since credit scores are used in determining insurance rates, employment, interest rates, underwriting approvals, and more, make sure you get the most out of that credit score for more than just your home loan!)
Remember, when it comes to credit scores, everyone is a number. So, you may as well have a good one!
Do you have any questions? Reach out to one of our Loan Officers today!