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Active-duty service members and veterans have an ace in the hole when it comes to realizing the dream of home ownership: the VA loan, a mortgage guaranteed by the U.S. Department of Veterans Affairs. Issued by private lenders, VA loans have several benefits for eligible applicants including some very favorable terms for the borrower such as lower interest rates, no requirement for private mortgage insurance, and the option for 100% financing and no down payment.
While you may think you need an outstanding credit score to land a home mortgage, lenders tend to be more lenient when it comes to credit requirements for VA loans compared with a conventional loan. And you won’t need a perfect score to enjoy great rates and terms for the life of the loan.
VA Home Loan Credit Score Requirements
Potential borrowers with a low credit score shouldn’t rule out the idea of qualifying for a VA loan. Lenders set their own minimum requirement for credit scores and most require a minimum FICO score of 600-620, but other lenders allow for scores as low as 500.
Who Sets VA Loan Credit Score Requirements?
While the VA oversees the loan program and guarantees a portion of each loan in the case of default, it does not issue the loans nor does it set credit-score requirements for lenders.
The VA does, however, ask that lenders look at the full credit profile of the person applying for a VA loan. Lenders also are free to establish their own minimum credit scores based on their risk tolerance, so a borrower may find more forgiving or stricter requirements depending on where they apply for the loan.
Can You Get a VA Loan With Bad Credit?
With no set minimum credit score for a VA loan, it may be possible to obtain a loan with bad or even no credit. Since the loan is guaranteed by the VA, a lender may feel more protected when considering whether to approve borrowers with low or no credit. A credit score is one consideration that will help a lender make a decision on an applicant, but there will likely be other questions about your finances before moving forward. If you have no real credit history or a low score, you may be asked to show a lender evidence of your ability to pay bills such as rent, utilities or cell phone on time.
Why Are Credit Score Requirements for VA Loans Less Strict?
Because the VA assumes some of the risks on these loans, lenders may feel more comfortable approving borrowers with a low credit score or a spotty financial history. This backing from the VA is why there’s no official credit requirement from the government, and why the lender is allowed to determine its own risk tolerance.
How To Improve Your Credit Score for a VA Loan
While a borrower with a low credit score may still be able to secure a VA loan, the low score means they will face a higher interest rate on the loan and a make a higher monthly mortgage payment. A credit score of 740 or higher will likely qualify a borrower for more competitive interest rates, thus saving significant amounts of money over the life of the loan.
If you are unable to qualify for a VA loan or simply want to improve your credit score so you enjoy more favorable terms on your loan, there are some ways to improve your credit score:
- On-time payments: Make all of your credit card and loan payments on time. A late payment can be reported to the three credit bureaus, dragging down your overall score.
- Consider debt consolidation: If you’re struggling to keep track of what you owe and where to direct your money, it may be time to consider debt consolidation. A debt consolidation loan lets you borrow money from a bank or credit union to pay off your existing debts, leaving you with one regular bill to track and pay.
- Improve your debt-to-income (DTI) ratio: Lenders will examine your DTI to see what you earn versus what you owe to creditors, dividing your total monthly debts by your gross monthly income. A ratio above 41% means a lender will be taking a harder look at your finances, so it’s best to pay down and eliminate debts in order to improve your odds for approval and better rates.
- Have a mix of credit lines: Your credit score can increase if you demonstrate you can manage different types of debt, such as auto loans and credit cards.
- Limit applications for new credit: A new application can directly affect your overall credit score, by as much as 10%, so wait until after closing to apply for any new credit lines.
Additional VA Loan Requirements
Your credit report and finances won’t be the only areas scrutinized by a lender when it comes to securing a VA loan. The VA has very specific standards for its appraisal requirements, so the house must be structurally sound, safe and move-in ready. Other VA standards include the replacement of chipped or peeling paint for houses built before 1978, or pest inspections for properties located in certain parts of the country.
Credit Score Requirements for VA Loans Compared To Other Home Loans
Overall, a VA loan has perhaps the most favorable conditions and credit-score requirements compared with other programs and options.
- Conventional loans: These loans lack government backing, making them harder to obtain because of the increased risk faced by the lender. To get approval, applicants need higher credit scores and significant down-payments. Applying with a credit score below 740 means your application will be highly scrutinized and you’ll likely pay considerable lending fees.
- FHA loans: These loans are backed by the government and credit requirements are forgiving (as low as 500), but borrowers must have 3.5% to 10% to put down. Borrowers will also pay for an up-front mortgage insurance premium plus monthly mortgage insurance for the entire duration of the loan.
- USDA loans: These loans don’t carry a minimum credit score and are backed by the government, but are only available in rural areas.
