Some Veterans ask if there is a minimum credit score to qualify for a VA loan. A mortgage professional will tell you that, yes, your credit history does play a role.
Lenders use your credit score and credit history to understand your past borrowing behavior. A history of paying money back on time, and a credit score in the mid-600s or better may improve your chances that a lender will consider you for a VA mortgage. On the flip side, bankruptcy, foreclosure, a pattern of late payments, frequent applications for credit, and other factors may reduce those chances.
MYTH: Credit score doesn't matter for VA loan qualifying.
FACT: The VA may only back a loan if the borrower is a satisfactory credit risk. And, for an approved lender to determine credit risk, they will closely examine a borrower’s big credit picture, including credit score.
What Is Credit?
When you first talk to a lender, you may notice pretty quickly that they will suggest having a look at your credit. Credit, in this context, refers to your credit history. So what do lenders look for? With your permission, the lender will request and review your credit reports to understand how you manage your credit. When you’ve taken out loans, for example, have you made payments on time and in full? Have you been consistent about repaying your debts? Have you had a variety of debt, or has it all been one type, like credit cards? Have you had any debts in collections? What about bankruptcy or foreclosure? A lender can gauge a lot by looking at your past credit behavior.
What Is a FICO Score?
When your lender pulls your credit, it means they are getting a report from one, two, or all of the “Big Three” credit reporting agencies: Equifax, TransUnion, and Experian. Each uses some version of the FICO scoring model to calculate a credit score based on your history. FICO scores — which range from 300 to 850 — are used in over 90% of U.S. lending decisions. It’s useful to note that your FICO score can vary across the three credit agencies.
Source: https://www.experian.com/blogs/ask-experian/credit-education/score-basics/what-is-a-good-credit-score/
Let’s say you apply for a mortgage, and your FICO scores are 680, 685, and 690. Since lenders typically use the middle of the three scores for qualifying, 685 would be the score that’s used.
Why Do Lenders Need a Credit Score?
You may be wondering why lenders set minimum credit requirements, when it’s the VA that administers the VA home loan program. To understand this, it’s helpful to know some basic facts about VA loans. First, the lender originates, processes, underwrites, closes, and funds a VA loan, not the VA. The lender, therefore, sets its own guidelines for the money it lends. The VA guarantees a portion of the mortgage for the lender when its standards are met. This backing enables lenders to offer great features to eligible and qualified Veterans such as no down payment and no private mortgage insurance (PMI).
So when you apply for a VA loan, your lender checks to make sure you meet the VA’s requirements as well as their own underwriting standards. They need to know you have a track record of repaying your debts. And one of the most proven ways of doing that is to look at your credit score. Generally, a credit score is a good indicator of borrowing behavior.
Do You Need Perfect Credit for VA Loans?
Just because your credit score is one of the elements used to qualify you for a VA loan doesn’t mean you need perfect credit to be approved. Dings on your credit report — a late payment here, or a maxed-out credit line there — can lower your score, but may not necessarily disqualify you for a VA loan. Remember, a score in the mid-600s increases your chances of qualifying.
If you’re thinking about applying for a VA mortgage, you will want to take care to make your loan, credit card, and other payments on time.
Will a Credit Pull Impact My Credit Score?
A “hard” credit inquiry is needed for a lender to approve your loan. Hard inquiries can temporarily impact your credit score. According to Experian, hard inquiries can reduce your score by as much as five points.
Your Veterans First loan professional may suggest doing a “soft pull” of your credit report first. A soft pull doesn’t impact your credit score, but it does allow the lender to get an idea of where your credit stands before moving forward.
If you are talking to more than one lender, it can be helpful to know that multiple inquiries are generally counted as one inquiry if made within a given period of time. According to Equifax, that time frame is typically from 14 to 45 days.
For further assistance with VA loan eligibility, ask a member of our experienced team.
