One of the biggest questions any potential mortgage borrower has is what is the minimum credit score required? This is the case for almost any type of program, including the VA loan. Would a good score help you obtain a VA loan better than a mediocre one? The question has multiple answers and it honestly depends on your situation. The goal of the VA is to provide affordable and obtainable financing for any veteran. To make things more complicated, the VA doesn’t dictate what the lowest score allowed is – each lender has their own rules.
How the VA Works
The VA does not fund VA loans, just like the FHA does not fund FHA loans. Instead, they guarantee the loans. This means they help the lender fund the loan by promising them a return on a portion of the funds if the buyer defaults. VA loans have the lowest default rates amongst any other loan program, though. Because the VA is not the one funding the loan, they don’t require a specific credit score. They have recommendations and they have other guidelines, such as the need to be a veteran for a specific amount of time with an honorable discharge, but they don’t dictate the things the lender should decide.
The Average Minimum Credit Score
Because the requirements can vary from lender to lender, many borrowers want to know the average minimum credit score for a VA loan. Generally, this number is around 620 give or take a few points. You may find a lender that wouldn’t touch a 620 credit score for any program, while you may find others that may go as low as 600. The fact that the VA backs the loans up truly helps lenders be a little more lenient with their credit requirements.
Given the fact that a score of 620 falls within the “poor credit” category, it is a fairly simple score to obtain. If you have a score of at least this number, you should be able to find a handful of VA lenders willing to provide you with a loan. This, of course, assumes your other factors, such as stable employment, good income, and a decent debt ratio applies to your situation.
Using Alternative Credit
Another benefit of the VA loan applies to you if you don’t have a credit score. This may happen if you don’t have enough trade lines to trigger a score. Without a score, it is hard for lenders to determine your financial responsibility. Luckily, the VA allows lenders to use alternative credit. This means using resources that do not report to the credit bureau. If you pay rent, this is a form of alternative credit. A few other examples include:
- Utility payments
- Insurance payments
Any bill you pay on a regular, monthly basis that the lender can verify may count. You have to be able to obtain proof of the payment with your canceled check and/or a written letter from the entity you pay. The lender needs to determine that you pay the debts on time each month and in its entirety in order for it to count. Typically, non-traditional trade lines with at least a 12-month history are sufficient to qualify you for a VA loan.
There are other things the lender looks at on your credit report aside from the score. These items include:
- The number of late payments in the last 12 months – The VA does not want you to have any late payments in the last year. They may provide an exception for one late payment, but that is usually the limit. If you have multiple late payments, you may have to wait until a full 12 months passes with on-time payments in order to secure VA financing.
- No collections – If you have outstanding collections, be prepared to pay them before the lender will allow you to close on your VA loan.
- No federal debts – The same requirement rings true for federal liens. You have to pay them before applying for a loan. If you defaulted and never took care of the issue, you may not be eligible for VA financing at all.
- Bankruptcies and foreclosures – If you suffered a bankruptcy or foreclosure in the past, you may have to wait 2-3 years after discharge of the event in order to qualify for VA financing.
These factors may or may not affect your credit score, depending on how long ago they occurred. The lender needs to make sure the negative credit issues are behind you and that you have your best financial foot forward when you apply for a VA loan.
As you can see, there are many factors the lender looks at when you apply for a VA loan. Your credit score is not the determining factor. According to the VA, the score doesn’t really matter at all, but most lenders will at least look at it to see where you stand. Both the lender and the VA pay more attention to your credit history and how responsible you were over the last 12 months. If you had negative issues that occurred, you are not automatically ineligible, you just might have to wait a little longer for VA financing. The exact time you have to wait depends on the severity of your negative credit and how well you recovered from it prior to applying for VA financing.
The beauty of many lenders offering VA loans is you have the ability to shop around. If one lender turns you down due to a lower credit score, try applying with another lender. As long as you apply for the loans close together, your score will not suffer from too many inquiries. Even if you receive an approval from one lender, it is a good idea to check to see what other lenders have to offer. You never know when you might find a better deal regarding the interest rate and/or closing costs. Always take the deal that benefits you the most not only now, but in the future too.