What Is The Minimum Credit Score For A VA Loan?

Minimum VA Loan Credit Score For A Home Purchase Or Refinance?

The VA loan stands out as a highly favored option among America’s eligible active-duty and veteran service members, offering compelling advantages such as attractive interest rates and the opportunity to purchase or refinance a home with zero down payment. However, lenders impose certain criteria that applicants must meet.

In this discussion, we’ll delve into the minimum credit score needed to qualify for a VA loan, equipping you with the knowledge to navigate the application and approval process more effectively.

What Constitutes the Minimum Credit Score for a VA Loan? 

Asking about the minimum credit score for a VA loan can be somewhat misleading. The reality is that the Department of Veterans Affairs (VA) itself does not issue loans nor does it mandate a minimum credit score for the loans it guarantees. This absence of a stringent credit score requirement contributes to the appeal of VA loans, notably including the typical lack of a down payment.

However, while the VA refrains from setting explicit credit score benchmarks, individual lenders determine their own criteria based on their willingness to accept risk. Later, we’ll examine the specific policies adopted by Elevation Mortgage® in this context.”

Is It Possible to Secure a VA Loan with Poor Credit? 

If you find that your credit score falls short for qualification, the initial step is to understand your current credit standing. You can access your free credit score and report weekly from Elevation Homes℠. This service provides you with a complimentary VantageScore® 3.0 credit score and monthly report from TransUnion®.

Upon reviewing your credit report, should you encounter any discrepancies or unfamiliar entries, you have the option to dispute these. If your report is accurate but your credit requires improvement, consider these strategies to enhance your score:

• Ensure timely bill payments: Starting now to pay your bills on time can gradually improve your payment history and boost your score.
• Monitor your credit utilization: Aim to maintain your balances on credit cards and revolving credit lines below 30% of your limits. Paying off balances monthly avoids high interest charges.
• Avoid unnecessary credit inquiries and new accounts: New credit applications and opening unnecessary accounts can temporarily lower your score.

Improving your credit score is beneficial even if you currently qualify, as it could secure more favorable interest rates in the future.

What Does Elevation Mortgage Require for VA Loan Credit Scores? 

Lenders independently establish their criteria for loan approval, including credit evaluations, based on their risk appetite. The underwriting process verifies that applicants meet these standards from a credit standpoint. Let’s delve into Elevation Mortgage’s requirements for VA loans. We’ll also explain some terms that might be new to you.

VA Approve/Eligible Purchase or Refinance Criteria 

VA loans typically undergo evaluation through an automated government underwriting system. Approval via this system without manual review is termed “approve/eligible.” At Elevation Mortgage, a minimum median FICO® Score of 580 is required.

Applicants with scores ranging from 580 to 619 face stringent conditions regarding allowable housing expenses and total debt burden.

The housing expense ratio is one metric used, calculated by dividing your projected mortgage payment (inclusive of taxes, insurance, and any applicable homeowners association dues) by your gross monthly income, expressed as a percentage.

[ {Mortgage Payment/Gross Monthly Income} = {Housing Expense Ratio} ]

For those with credit scores under 620, the maximum allowable portion of pre-tax income spent on housing cannot exceed 38%.

Additionally, the debt-to-income ratio (DTI) is assessed, comparing your monthly debt obligations against your gross monthly income.

[{Installment Debt} + {Revolving Debt})/{Gross Monthly Income} = {DTI} ]

For applicants with credit scores below 640 and down payments under 5%, the overall DTI, including mortgage and all other debts, must not surpass 45%.

With a credit score of 620 or above, the primary focus shifts to the DTI. A higher credit score may widen your housing options. There isn’t a specific DTI requirement for scores above this threshold; instead, it’s determined by a combination of your credit score and down payment or existing home equity.”

VA Refer/Eligible Purchase or Refinancing Options 

Should the VA’s automated system not grant approval, there remains a pathway to securing a loan through the “refer/eligible” method. This process involves manual underwriting, where an underwriter meticulously reviews your documentation to assess qualification.

Applicants who do not meet the criteria for automated approval often have adverse entries in their credit history, such as delayed mortgage payments, previous bankruptcies, or foreclosures.

For manual underwriting consideration at Elevation Mortgage, a minimum median FICO® Score of 640 is required, along with a debt-to-income (DTI) ratio that does not exceed 45%. In refinancing scenarios, borrowers must retain at least 10% equity in their property.

VA Jumbo Loan Guidelines 

Although the VA itself does not impose specific loan caps, lenders may designate a threshold above which a loan is deemed higher risk. Typically, lenders align this threshold with the conventional loan limit for the area. For regions outside high-cost zones, the prevailing conventional loan limit stands at $726,200. Loans exceeding this amount are classified as VA jumbo loans.

For those with full VA entitlement and a qualifying credit score of 620 or above, it’s possible to secure a jumbo loan without any down payment for purchases or to refinance up to the total value of your home equity, for loan amounts up to $1.5 million. Loans up to $2 million are available with a 10% down payment or equivalent home equity and a minimum median credit score of 680.”

Why VA Loans Have More Lenient Credit Score Guidelines 

VA loans are supported by the government, offering a layer of security to investors purchasing VA mortgage bonds on the secondary market with a government assurance. This is in contrast to conforming loans from entities like Fannie Mae or Freddie Mac, which adhere to their own stringent criteria without offering investors any guaranteed returns.

Applying for a VA home loan involves going through a private lender for the purpose of buying or refinancing a property. The VA guarantees the loan if it aligns with their standards, including the stipulation that the property must be the borrower’s primary residence and adhere to specific debt-to-income (DTI) ratios.

The added protection for lenders in financing VA loans results in a willingness to accept applicants with lower credit scores. Consequently, there isn’t a universal credit score requirement, although individual lenders might establish their own criteria.

Further Criteria for VA Loans 

In addition to assessing an applicant’s financial health, the VA imposes detailed conditions on the property itself, adopting many appraisal standards similar to those used for FHA loans. The property under consideration must be structurally sound and meet specific safety and livability standards, such as safe and intact paint surfaces in homes built before January 1, 1978, and mandatory pest inspections in several states.

Eligibility for VA Mortgage Loans 

VA loans are exclusively available to eligible service members, veterans, and the surviving spouses of those who died in service or from service-connected injuries. This benefit recognizes the sacrifices made by military personnel and their families.

Eligibility hinges on receiving a certificate of eligibility (COE) from the VA, primarily based on meeting service duration requirements, though exceptions exist for surviving spouses and those discharged due to injuries.

For those eligible but yet to obtain their COE, assistance is available to expedite this process.

Advantages of VA Loans 

VA loans offer numerous advantages, including no required down payment or mortgage insurance, and the unique ability among major mortgage options to liquidate 100% of home equity. Additionally, VA loans typically come without borrowing limits and offer competitive interest rates.

The VA guarantees a portion of the loan in case of default, reducing the risk for lenders and enabling more favorable loan terms, including relaxed credit requirements.

Guarding Against VA Loan Scams 

The attractive benefits of VA loans can unfortunately attract scammers. Veterans should be cautious of schemes suggesting payment redirection or requesting funds via gift cards. No legitimate lender will claim to represent the VA or other government agencies directly.

Always verify the legitimacy of unsolicited offers and report any suspicious activity to appropriate authorities, such as the state attorney general or the Federal Trade Commission, to protect yourself and others from potential fraud.

Key Takeaway: Credit Score Criteria for VA Loans Is Determined by Individual Lenders 

The Department of Veterans Affairs doesn’t mandate a specific credit score for VA loans; this decision is left to the discretion of individual lenders. Elevation Mortgage, for example, sets a baseline credit score of 500 for eligibility. However, achieving a higher credit score could unlock more advantageous loan terms. The VA guarantee offers lenders the flexibility to accommodate a broader range of borrowers, including those whose financial history may not be immaculate.

Interested in exploring a purchase or refinancing option? You’re encouraged to apply online today or reach out directly at 719.247.6622