Minimum credit scores are something most borrowers worry about when trying to determine what type of financing they can obtain. The problem with the VA loan, however, is that there is no minimum credit score per se. The VA itself does not have a specific score that they look for when qualifying a borrower. The problem is that it is not the VA that does the qualifying, nor do they provide the funds. The money is provided by a bank. It is this bank that sets the precedent regarding the minimum credit scores they will allow for a VA Loan.
Credit Requirements for VA Loan Eligibility for Veterans
There is not one blanket policy that states what credit score lenders will accept when it comes to a VA loan. The beauty in this is that you can shop around if one lender turns down your application. You are not restricted to using a certain lender; you just have to use a lender that is VA approved. It is also recommended that you use a lender that is well versed in VA loans to ensure that the process goes smoothly. In general, however, most lenders will not take a credit score that is below 620. This is the typical point where a loan becomes too risk and not very many lenders will take that risk.
Compensating Factors for Deficient Credit
There are the lenders that are few and far between that will take the risk and go down to a credit score of 580. This does not mean that someone with terrible credit, say 590 that has no assets, a high debt ratio, and inconsistent income will get approved, however. Lenders that allow lower than average credit scores typically require compensating factors. This could be any of the following:
- Low debt to income ratio
- Long standing, consistent income (been at the same job for many years)
- Excessive assets allowing you to put down a large down payment
- Excessive assets enabling you to have a high disposable income every month after the mortgage payment
Some lenders will accept one of the factors above as a compensating factor, while others will require you to meet several of the above factors in order for them to take on the risk of your low credit score.
Along with a credit score, the VA and the lender are concerned with your credit history. Again, the VA is much more lenient when it comes to the requirements for the VA loan, allowing borrowers to use alternative credit histories rather than standard trade lines if necessary. Most lenders are not that lenient, however, and require at least 2 standard trade lines in order to consider a borrower for a VA loan. The standard trade lines include any of the following:
- Credit cards
- Personal loans
- Auto loans
- Student Loans
The length of time you held any of these trade lines will also play a role – most lenders require them to be reporting for at least 2 years in order to be used for qualifying purposes.
If a lender does accept alternative lines of credit, they are usually looking for 12 months of timely payments from any of the following companies:
- Phone companies
- Insurance payments (medical, auto, house)
- Rent payments
Every lender has their own requirements regarding what they will allow for alternative credit, so it is worth asking the lender to see what they require.
Negative Credit History
The VA does allow some concessions for delinquent credit histories, but like most other loans, you must have fairly timely payments in your recent credit history in order to be approved for the loan. Generally, no more than one 30-day late payment is allowed in the last 12 months out of any of your outstanding credit. This allowed 30-day late cannot be on any type of housing payment during the last 12 months or it will not be able to be insured by the VA. In addition, as with all other requirements, a specific lender may have their own requirements. Some lenders are not willing to accept any late payments in the last 12 months, especially if they are accepting a lower than average credit score.
As with any loan, the VA loan has certain time periods that must elapse before the VA can insure a loan. These circumstances include:
- Bankruptcy – A Chapter 7 BK must be discharged for at least 2 years before applying for the VA loan. A Chapter 13 BK must have on-time payments for the last 12 months and approval from the trustee overseeing your case before you can apply for the loan.
- Foreclosure – Applicants must wait 36 months after a foreclosure to obtain another VA loan.
- Collections – In most cases, all collections must be paid before a VA loan can fund. If there are special circumstances, such as is the case with certain medical collections, an exception can be made.
- Judgements – No outstanding judgements are allowed when funding a VA loan.
Liens – All liens must be paid and cleared before a VA loan can fund.
As you can see, there are many factors that go into approving a VA loan. It is not a matter of just looking at your credit score and approving you for the loan. The lender will go over your credit history and determine your level of risk in terms of having a new mortgage. If you have any special circumstances, such as a bankruptcy or foreclosure, you cannot get a loan even if your credit score has improved high enough to qualify until enough time has passed. As stated before, however, every lender has their own requirements, so if you are turned down by one lender, you can always shop with another, just make sure to do it within a 2-week period so that your credit score is not hit for multiple inquiries bringing your score down even further.