Your credit score is a good indicator of how you'll treat a future mortgage obligation, which is why most lenders place a lot of weight on the 3-digit figure. Unlike most mortgage programs, home loans guaranteed by the Department of Veterans Affairs place more emphasis on other eligibility factors. The VA guarantees a portion of each VA loan, meaning it will partially reimburse a lender if a borrower defaults. This government guarantee helps lenders finance military veterans and active service members, with less risk involved. The VA sets no minimum credit score, however, individual lenders may.
What the VA Says About Scores
The VA has developed standard guidelines that participating lenders must adhere to. You can find the official VA lenders handbook on the VA's official portal known as the Web Automated Reference Material System, or WARMS. The VA lender's handbook makes no mention of minimum credit scores. The program eligibility page of the VA's website states that borrowers need "suitable credit," which is ultimately determined by individual lenders through the mortgage underwriting process. Most lenders impose minimum credit scores on top of the VA's guidelines. The stricter credit rules are known as overlays.
Lenders Consider Fair Credit Okay
Most lenders require a minimum credit score of 620. Because VA loans are intended to help military members acquire homes affordably, the loans require no down payment. Typically, the lower your down payment the higher your credit score should be. However, the government's backing allows lenders to offer VA loans with a relatively low credit score requirement. According to Credit.com, 600 is considered poor credit, and a 620 is on the low-end of fair credit. Lenders that do venture to finance borrowers with less than a 620 typically charge higher interests rates.
Ways to Improve Bad Scores
Rather than take a VA loan at a premium interest rate if you have bad credit, try to increase your score. Typically, lenders are willing to help viable borrowers improve their credit scores so they can ultimately approve the loan. They can advise you on how to pay off debt and collections, reduce your overall debt load or dispute and remove inaccurate information from your credit report, which boosts scores. You can either hire a third-party credit repair company or deal directly with the three major credit reporting agencies -- TransUnion, Equifax and Experian -- to improve your scores. To fix your credit, you generally need money to pay debts and any third-party fees, and sufficient time, as the process can take several days to several months.
Other Eligibility Requirements
Lenders consider other aspects of your application and finances to determine whether you qualify for a VA loan. For example, you must have a Certificate of Eligibility, or COE. It comes directly from the VA and establishes your specific eligibility for a VA loan. You must provide the VA with certain documents about your military service to obtain your COE.
Lenders measure your monthly debt payments against your gross income with a percentage known as the debt-to-income ratio. The VA's DTI limit is 41 percent, meaning lenders want you to use no more than 41 percent of your gross income each month toward all debt, including the VA mortgage.
- U.S. Department of Veterans Affairs: Home Loans Eligibility
- Veterans United: Do VA Loans Have Credit Score Minimums?
- Credit.com: What Is a Bad Credit Score?
- U.S. Department of Veterans Affairs: Certificate of Eligibility
- Military.com: VA Loan and the Debt Ratio
- U.S. Department of Veterans Affairs: Web Automated Reference Material System Lenders Handbook - VA Pamphlet 26-7