The VA loans are made available by the U.S. Department of Veterans Affairs (VA) for service members and veterans who meet certain criteria along with the qualifying spouses. Such loans offer an excellent opportunity for homeownership with features like no down payment and low interest rates. A very common question that comes up for VA loan applicants is, “Is there a minimum credit score for a VA loan?”
Guide to VA Loans and Minimum Credit Score Requirements
There is not a standard minimum credit score requirement from the VA itself with VA loans, which is the opposite of conventional loans that have hard credit score requirements. Instead, the lender sets the credit score requirements according to its own risk assessment of a borrower.
Most lenders, however, have a minimum credit score requirement for VA loan approval, typically around 580 to 620. Lenders may approve applicants with lower scores but having a strong credit score enhances the likelihood of being offered attractive loan terms.
Importance of Credit Scores for VA Loans
While VA loans typically pose a little more flexibility when it comes to credit traits, having a good credit score is still essential for approval. Here’s why:
- It Compares the Risk of Lender: Lenders use credit scores to evaluate the risk of borrower. A good score reflects responsible financial behavior, and lenders are more likely to approve the loan.
- Interest Rates: Those with higher credit scores tend to be charged lower rates, which can save thousands of dollars over the life of the loan.
- Loan Approval: The VA does not require a minimum credit score, however, lenders do. If your credit score is low, it could be hard to get approved.
Common Credit Score Requirements by VA Approved Lenders
Lenders have different credit score requirements, but most follow this general rule of thumb:
- Below 580: Approval is uncommon, although some lenders may give the green light to applicants with solid compensating factors.
- 580 – 619: The loans may be approved by some lenders, but with stricter requirements.
- 620 – 679: Often in the safe zone for most VA Approved lenders, improving your chances for approval.
- 680 and above: Typically qualifies for best interest rates and loan terms.
Things that Might Counterbalance a Low Credit Score
Even if your credit score is below 620, you could still qualify for a VA loan if you have other strong compensating factors, such as:
- Stable Employment History: Lenders are also more likely to be concerned if you have not had consistent income for the last two years.
- Good Debt-to-Income (DTI) Ratio: A low DTI ratio (usually under 41%) indicates that you don’t overextend yourself with debt.
- Shows of Significant Savings: Having cash reserves can influence lenders approval of your loan.
- Timely Rent and Utility Payments: A history of timely rent and utility payments can provide an alternative credit signal.
How to Improve Your Credit Score for a VA Loan
You may want to follow these steps to improve the score if your number falls below their preferred lender threshold:
- Check Your Credit Report: Get a complimentary report from the major credit bureaus (Experian, Equifax, TransUnion) and contest any mistakes.
- Pay Bills on Time: Make sure you pay credit cards, loans and utilities on time that builds a strong credit history.
- Lower Credit Utilization: Ideally, limit credit card balances to no more than 30% of your limit.
- No New Debt: Do not apply for any new credit accounts (or debt) before applying for a VA loan.
- Work with a VA Loan Specialist: Some lenders will provide you with credit counseling to guide you on improving your score to qualify for a loan.
VA Loan Benefits No Matter What Your Credit Score
VA loans have several advantages that make homeownership more attainable, even if your credit score is imperfect:
- No Down Payment: Many conventional loans require a down payment of 3-20% of the purchase price; VA loans give qualified borrowers the ability to finance 100% of the home’s purchase price.
- No Private Mortgage Insurance (PMI): Conventional and FHA mortgages generally require PMI when the down payment is below 20%, whereas VA loans do not.
- Competitive Interest Rates: VA loans often have lower interest rates than conventional loans.
- Easy credit requirements: Borrowers may still qualify even with a lower credit score due to other financial strengths.
What to do if you’re VA Loan Is Denied because of Your Credit Score
If a low credit score causes your VA loan application to be declined, don’t despair. Here’s what you can do:
- Request Feedback from the Lender: Learn the reason for the denial and which credit problems need to be improved.
- Work to Improve Your Credit: This is where you implement the strategies above to get your credit up.
- Embrace One application with a Different Lender: Some lenders exhibit more flexible requirements than most.
- Consider a Co-Signer: You might also want to consider a co-signer if your spouse or another eligible co-borrower has a higher credit score than you. This can also help boost your chances of getting approved.
Conclusion
The VA itself does not have a minimum credit score requirement, but lenders typically want to see at least a 580-620 credit score for VA loan approval. The higher your credit score, the easier it will be to find lower interest rates and more favorable loan terms. If your credit score falls short of the desired level, you can still qualify by proving your financial stability and responsible management of funds.
If you can make even small changes to strengthen your credit, you will set yourself up for success in a VA loan and, potentially, a very beneficial homeownership experience. If you’re uncertain of your credit standing, you might want to consult with a VA loan specialist to help guide you through the process and review your options.