Current military, Veterans, surviving spouses, and the military family experience areas in life that others cannot imagine. Literally, a service man or woman may routinely have their lives at stake in order to provide our freedom. Being away from home is common. Way too common. It is heart breaking and is why we still get teary eyed whenever we see a child run to their mother or father’s arrival from a deployment. Everyone has circumstances in their lives, but in many ways military families have it harder than most. For such reasons, the Veterans Administration offers the awesome VA home loan that is more flexible than most mortgage programs. Yet as shown later, VA loans have one of the lowest delinquency rates in America. One of the most beneficial features we will explain includes flexible VA home loans credit score guidelines.
VA Home Loans Credit Score
A common question is, “What is the minimum credit score for a VA loan?”. Technically, there is not one. Although, VA lenders usually have set their own credit score limitations. As in any home loan, the higher the credit score, the better chance of loan approval. With compensating factors, OVM Financial’s VA home loans credit score guidelines allow under a 600 score. Below, we explain ways to improve a Veteran’s chance of approval through these compensating factors.
Credit scores not only affect a VA loan approval, they also influence VA interest rates. Unlike a conventional loan which increases the interest rate every 20 points lower than 760, VA is again more forgiving. Let’s compare how a buyer with a 640 score would benefit by choosing a VA loan over a conventional loan. Hint, VA wins about every time!
First of all, a 640 credit score would dramatically increase the conventional loan interest rate and mortgage insurance. The result is a higher mortgage payment. But, a VA loan would still have no monthly mortgage insurance and the financed funding fee is the same as if it were an 800 score. Additionally, when it comes to VA loans, the interest rate for a 640 score barely differs from a buyer with a 760 score. Therefore, a lower payment. Furthermore, obtaining a conventional loan underwriting approval with a 640 score could be difficult. Whereas, VA loans with a 640 credit score very commonly receive underwriting approvals. Want to increase credit scores? Check out, “3 ways to improve your credit score that won’t break the bank“.
VA Loan Manual Underwriting
Initially, lenders use automated underwriting systems for VA loan pre-approvals. Each lender’s goal is to obtain an automated approval in which to use as a guide to underwrite the file. Although, not all VA loan borrowers receive an automated approval. Thankfully, these buyers have an additional ownership opportunity through the VA loan manual underwriting guidelines. Basically, this means everything is reviewed by a human underwriter. Everything not only means ensuring the scenario meets the guidelines, but it also means reviewing the circumstances and compensating factors. What caused the buyer’s lower credit score? Has the Veteran put corrective measures in place? Does the scenario fit within VA guidelines? Finally, is there a high probability the Veteran can and will make the payments?
VA Loan Approval With Limited Credit
As one can tell, VA loans are forgiving in the area of credit scores. It would be easy to think that buying a home with no money down would require a well established credit history. Actually, this is not the case with VA loans! VA home loans credit score guidelines excel in the area of limited credit. Limited credit, also known as thin credit, could mean one of a few things.
- Less than 3 credit scores
- New credit
- Recent re-established credit after bankruptcy, foreclosure, or short sale
Understanding which factors increase or decrease a credit score is important. Especially, if considering a home purchase. A highly recommended article of ours called, “What comes before house hunting season? Credit score improvement season“, explains the overall makeup of a credit score. Understanding and using this knowledge increases the chance of VA loan approval
Less Than 3 Credit Scores
Typically, while underwriting a loan, lenders use the middle of 3 credit scores. Yet, not all buyers have 3 credit scores. There may be two, one, or even no credit scores. The primary reason is lack of recent credit history. Basically, there is nothing to grade in recent history. We do have solutions for buyers with only 1 or 2 credit scores!
New Credit History
New credit history is not the end of the world. Especially, if new credit history is paid on-time. It is even possible for a buyer with a sufficient credit score, but only one credit trade line reporting to receive a VA approval. In this case, additional alternative credit references and/or rent would be needed to supplement the lack of credit depth.
Previous Credit Event
Other buyers that may have previously experienced a big derogatory credit event, would need to show re-established credit history. Such events include a chapter 7 or 13 bankruptcy, foreclosure, deed in lieu of foreclosure, and a short sale. VA home loans credit score guidelines make it possible to buy a home after all of these events as long as there is on-time, sufficient re-established credit history. Again, if there is limited credit, alternative credit references could be used.
Anytime there are credit challenges like low credit scores, limited credit, foreclosure, bankruptcy, short sale, previous late payments, or collections, compensating factors can play a key role in a buyer’s VA loan approval.
Guess what? Even though VA home loans dip down to provide home ownership on less than pristine credit situations, VA loan delinquency rates consistently rival conventional loans. So, how do VA loans which require no down payment and allow lower credit scores have similar delinquency rates as conventional loans which have a much higher down payment and credit score average? Probably has a lot to do with it being an affordable program with solid underwriting and borrowers who care about making their housing payment!
Top 10 VA Loan Compensating Factors
Whether a pre-approved or manually underwritten VA loan, compensating factors can push the scales in a buyer’s favor. Below is a list of compensating factor examples which strengthen a VA loan file. Although, not every one of these factors are required, the more the better.
- Rent history
- High residual income
- Asset reserves
- Low debt to income ratio
- Alternative credit
- Minimal payment shock
- Time on job
- Great explanation letter
- Re-established credit history
- Extenuating circumstances
Just a couple of the above compensating factors could make the difference in a denial versus loan approval. As a buyer, always mention the positives so that hopefully they outweigh any negatives. We hope this provides a better understanding of the flexibility offered within the VA home loans credit score rules.