What Is Fair Credit Rating – Questions To Ask
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The VA does not have a minimum credit score for a VA loan. But lenders who offer the loan often do. Conservative lenders will have a VA loans credit score requirement ranging from about 600 – 660. But lenders who are committed to helping the most veterans may set their minimum VA loan credit score as low as 520. However, they may require a 10% down payment for a VA loan with bad credit.
Each credit bureau (Experian, Equifax, and TransUnion) has multiple scoring models they use to calculate your credit score. Mortgage lenders use the Experian FICO 2, Equifax FICO 5, and TransUnion FICO 4 scoring models. If you don’t have a strong credit score be sure to pay all of your bills on-time for at least 12 months.
So let’s talk about how credit score can impact your ability to qualify for a VA home loan.
We should start by discussing what “overlays” are.
The VA determines what the rules and guidelines are for VA home loans. Every lender that wants to originate loans through the VA program has no choice but to adhere to the rules as set by the Department of Veterans Affairs.
However, the banks and mortgage companies that originate and service these loans have the option to add additional rules on top of the VA’s standard guidelines. This additional set of restrictions are commonly referred to as overlays.
Overlays are simply a unique set of rules that a bank or mortgage company creates to layer on top of the standard rules for any loan program they administer. Overlays are unique to each lender. Some lenders have a litany of overlays, while others may not employ any at all. While smaller lenders are no stranger to overlays, you can almost guarantee you’ll find them with large national banks and mortgage companies.
Often what happens is a veteran with a marginal credit score contacts a lender to apply for a VA loan, and the lender tells them they don’t qualify because the VA loans minimum credit score for the program is for example 640. THIS IS NOT TRUE!!!
The reality is that specific lender’s VA loan credit score minimum is 640. But that is their rule, not the VA’s. That is a classic example of an “overlay”. I want to make this clear….a VA loan minimum credit score does not exist.
That being said…if you’ve never paid a bill on time in your adult life (you know who you are), you’re not getting a damn mortgage. Every lender has access to the automated underwriting system that’s used for VA home loans. This software is what we enter your loan application into, and it tells us whether or not you’re approved for the loan.
You better damn well believe that system is looking at your credit score. If you’re the guy with 10+ disputed accounts on your credit report , and a credit score in the mid 500s (or lower) , it’s going to be tough to get that application approved. Getting a VA home loan with bad credit is a challenge.
While there isn’t a definitive credit score required for VA loan, I can give you some insight on what will get through.
If you are a first-time homebuyer or just a veteran who doesn’t have much money to contribute to the transaction, get your score up to at least 580. If you have a good work history, a low debt to income ratio, and plenty of residual income (per the VA calculation) we can often get VA home loan approvals for you.
It’s not guaranteed to work with a score that low. But if your score is lower than that, it becomes near impossible to get an approval. That is unless…..you have a home to sell or a stash of cash you should shoot for at least a credit score of at least 520. The beauty of the VA program is it doesn’t require a down payment, or the addition of private mortgage insurance to your payment. However, when your score dips below 580, sometimes putting money down is the only way to trigger an approval. This is the strategy for obtaining VA loans for bad credit profiles.
Sub-580 credit scores with down payments of 10% or more have a much higher probability of receiving approvals. While people with poor credit scores don’t usually have exhaustive savings, some may have windfalls coming through the sale of their current home.
That should make alarm bells go off for veterans who want to upgrade to a larger home, but have seen their credit scores decline since they originally purchased their current home. There’s a strong possibility that dream can still be a reality.
Which begs the question….is there other times when I need to put money down when using the VA home loan?
So watch my video on “When do VA home loans require a down payment” and I’ll break down when you’ll want or need to put some money up to use the program.