Buying a home is both exhilarating and somewhat overwhelming, especially when you begin to look at your financing options. If you have served in the military, or are a surviving spouse of someone who served, you may qualify for a VA home loan.
A VA loan is a unique type of mortgage that is guaranteed by the U.S. Department of Veterans Affairs (VA) specifically for service members. The most commonly asked question about VA home loans is, “What are the credit score requirements?” Continue reading to learn the answer to this question and more!
What is the Minimum Credit Score for a VA Loan?
The answer to this question will vary based on which private mortgage lender you work with. Generally speaking, there is no minimum credit score set by the VA. Although, some private lenders will require you to have a 620 minimum score.
The good news is that those same lenders that request a 620 credit score will oftentimes overlook a low score after they review your credit report. Specifically, they are looking to see that in the last 12 months, you have made payments on time – especially mortgage or rent payments.
Having a low credit score does not disqualify you from receiving a VA loan. You may need to look at various VA lenders to find one that will work with you. Some lenders will accept a score as low as 550 if paired with excellent payment history. It is important to note that for many loan providers, a better credit score will equal a better interest rate.
What Benefits Come with a VA Loan?
Several benefits come with a VA loan, such as no down payment or mortgage insurance requirements. The mortgage is only offered through major investors who convert 100% of your equity into cash and typically there is no loan limit associated with VA loans.
Military borrowers only have to wait two years after filing a Chapter 7 bankruptcy compared to four years with a conventional loan. There is also a short two-year wait period if a home was lost to foreclosure. Meaning that military personnel will be eligible to purchase a home quicker through a VA loan.
The VA does not fund the loans, however, they do take on some of the risks by paying lenders up to 25% of the loan amount if the mortgage is defaulted. By doing this, lenders can offer better interest rates while also providing flexibility on minimum credit scores.
Why are VA Loan Requirements for Credit Scores Less Strict?
VA loan requirements tend to be less strict because the loan is backed by a government agency. This allows private lenders to be more comfortable lending the amount because they know they will receive a minimum of 25% of the loan amount if it is defaulted on.
The loan is guaranteed by the VA as long as their requirements are met. The basic requirements are that the home is the buyer’s primary residence and that they meet a certain debt-to-income ratio.
Since the lenders are protected by the VA they are more willing to approve borrowers with a low credit score or little credit history. This is why the loan requirements tend to be viewed as less strict or even lenient.
Ways to Improve Credit Scores
Whether you have poor credit or are simply looking to improve your credit score before applying for a VA loan, these tips will help get your credit in line and on your way to having a loan approved!
The first step is to get a copy of your credit report and meticulously check it line by line. You can get a copy of your credit report directly from Experian, Equifax, and TransUnion. It is recommended to request copies from each to ensure that they all match.
Check for Mistakes
In the last step, it was mentioned to meticulously check the report line by line. This is so that if there is a discrepancy you can have it corrected. If you find an error, dispute that information directly to the credit reporting company that has the error listed.
It is best to explain in writing what you have found and why it is wrong. Include copies of any documentation that will support your claim and mail all information through certified mail.
If you have credit cards, pay them down as much as you can and keep the debt ratio low. Do not max out your credit limit and then leave it maxed. Once the credit cards are paid off, be sure to always pay them off in full each month. This will drastically help your credit score.
Make a Calendar
The last tip that is helpful when working on building your credit score is to make a calendar to track your bills. Paying your bills in full and on time greatly impacts your credit score. If you prefer to use electronics, utilize the calendar on your cell phone and add each bill with the due date and then be sure to add reminders to help keep you on track.
Begin the VA Home Loan Journey Today
The process is simple, partner with a trusted lender to find your dream home then order a VA appraisal and receive loan approval. Lastly, celebrate the closing of your new home! If you are ready to begin the journey to homeownership, check your eligibility today or contact the VA Loans for Vets team at (602) 908-5849 with any questions.