08 Aug What All Buyers Need to Know About VA Loans and Credit Score Minimums
A good credit score is an excellent starting point for anyone considering a VA loan. But what exactly is a good credit score? Does the VA have a credit score minimum? How do VA credit requirements stack up against other mortgage options? One of the best benefits of the VA loan program is its relaxed credit requirements.
Potential borrowers don’t have to possess blemish-free credit reports and elite credit scores to secure VA financing. The VA loan program seeks to accommodate as many military buyers as possible with a simple and accessible mortgage.
Do VA Loans Have Credit Score Minimums?
First of all, let’s understand the VA’s role in the VA loan process. The Department of Veterans Affairs oversees the program and guarantees a portion of each loan in case of default. But the VA does not issue loans, and the agency does not enforce credit score minimums. Both of those duties are handled by an individual VA lender.
Most VA lenders do use credit score benchmarks. Applicants with scores below a lender’s benchmark usually can’t be approved for VA financing. That minimum will vary from lender to lender, but most VA-approved lenders, including Veterans United Home Loans, are looking for a credit score of at least 620.
How do VA Loan Requirements Compare to Others?
FICO credit scores range from 300-850. FICO no longer releases the median nationwide score, but as of April 2016, the national average FICO score was 699. Keeping that in mind, a 620 minimum is fairly borrower-friendly. It’s not necessarily an easy score to obtain, but it’s definitely an accommodating benchmark when measured against other loan options:
Conventional loans: Conventional loans are not backed by the government. Since lenders are at greater risk without a government guarantee, conventional loans are tougher to obtain. Bigger down payments and higher credit scores are usually required to snag conventional financing.
According to John Councilman, federal housing chairman for The National Association of Mortgage Brokers, a credit score below 740 will bring on intense scrutiny and sizable fees in the conventional lending market.
As a result, most conventional borrowers maintain impressive FICO scores. In 2016, successful conventional loan recipients for purchase loans posted an average FICO credit score of 753, according to mortgage software provider Ellie Mae.
FHA loans: Like VA loans, FHA loans are backed by the federal government. There’s no credit score minimum, but most FHA lenders prefer a score of at least 620. In 2014, some lenders theoretically dropped their minimum score to 580, but lenders have generally set higher standards since the mortgage meltdown. Successful FHA borrowers typically have higher scores. The average credit score for all FHA purchases in 2016 was 686, which is well above the minimum 580 score.
FHA loans also require a down payment of 3.5 percent, as well as both an up-front mortgage insurance premium and monthly mortgage insurance, which now runs for the life of the loan.
USDA loans: USDA loans are yet another government-backed option, but they’re only allowable in rural areas. The USDA does not enforce a credit score minimum, but most USDA lenders are looking for a score of 660 or above. There are options to secure a loan below this score, but it requires additional paperwork and comes with additional requirements.
What if I Fall Short of the VA’s Credit Requirements?
Potential VA loan borrowers needn’t abandon their dreams of homeownership due to a low credit score. The best feature of credit is its fluidity. Your credit changes constantly. Improve your fiscal habits, and your credit score will soar. But knowing what improvements to make can be tricky. Should you pay off high-interest debt? Should you cancel certain credit cards? How should you handle that bankruptcy looming over your credit report?
Improving your credit requires commitment and hard work. If you’re ready to make the necessary changes in pursuit of a VA home loan, partner with a helpful advocate.