VA Loans: Why Credit Scores Matter
Credit scores are one “pillar” of VA loan approval, and combined with your loan repayment record and your history of income and employment, this information tells the lender a great deal about you as a potential credit risk.
But the credit score issue can be confusing for many. One of the most important things to know about VA home loans is that the Department of Veterans Affairs does not tell its participating lenders how to establish credit score requirements for VA home loan approval. There is no standardized or central VA loan standard FICO score “sweet spot” for loan approval.
Does that mean your credit scores do not matter and that the lender will not use them to qualify you for the loan?
No, it does not mean you won’t need acceptable FICO scores. The VA simply requires the lender to use FICO score requirements that are customary for the type of home loan you seek. Your credit scores will be a very important part of the loan approval process and not just for getting to “yes” on the loan.
What Are FICO Scores?
FICO stands for “Fair Isaac Corporation” and that company was instrumental in developing what we now use as a credit scoring model.
That scoring is, according to the Consumer Financial Protection Bureau, based on information submitted to and collected by credit reporting agencies. There are several ways to compute a credit score, but many lenders still use FICO scores as well as the information in your credit reports to determine your acceptability as a credit risk.
Credit scores are not the only factors used to determine your suitability for a home loan but they are a very important part of that equation.
What Is A “Good” Credit Score?
One of the big-three credit reporting agencies, Equifax, describes “good credit” scores as being in the 670 to 739 range. If you have credit scores below this range, you should NOT count yourself out of the running for a home loan, but you should know that lower credit scores could result in being offered less competitive terms and higher interest rates on your home loan.
Here is a list of credit score ranges you should know:
- Poor: 300-579
- Fair: 580-669
- Good: 670-739
- Very Good: 740-799
- Excellent: 800-850
What FICO Scores Are Needed To Buy A Home?
One major lender, Rocket Mortgage, has credit requirements that may be fairly typical of a home loan lender; your experience may vary but according to Rocket Mortgage guidelines it’s possible to qualify for a conventional mortgage with FICO scores 620 or better. The same lender says on paper it may be possible to qualify for a government-backed loan such as an FHA or VA mortgage with FICO scores at 580 or better. However, these minimums may not qualify for the lowest rates or best terms. FICO scores in the mid-600s may be closer to ideal for a VA loan.
Credit scores always matter when it comes to VA home loans, but not all lenders have the same requirements and you may find a VA lender willing to work with your circumstances where others might not.
It always pays to shop around for a home loan for this reason and while you are looking for the right lender it is a good idea to explore your options as a first-time home buyer where applicable including the availability of any local down payment assistance programs that could help offset the cost of a more expensive mortgage if your credit scores don’t qualify for the best rates.
How Do I Improve My Credit Scores?
There are three factors to consider when trying to raise credit scores so you can qualify for a better interest rate and a cheaper VA mortgage. One is time. You will need to take at least 12 months to work on your history of on-time payments (a year or more of consistent on-time payments may go a long way toward improving your scores). You will need to lower your credit card balances over this 12-month period, too.
Can I Pay Someone Else To Repair My Credit?
You can, but you are essentially paying a third party to do things you can do yourself for free. And remember that no company can remove accurate negative credit information from your report. Anyone who promises you they can do so is not telling you the whole story and you should never pay a third party promising it can remove accurate data from your credit reports.
Your Credit Scores And VA Home Loan Approval
As mentioned above, lower credit scores aren’t necessarily a deal-breaker when it comes to buying a home but you should expect to pay more for the loan. This may include being offered a higher interest rate to offset the risk of the mortgage. You may be able to get your lender to agree to approve your loan application even with lower FICO scores if you have the ability to make a down payment or have large cash reserves.
Credit scores are important for any type of major credit application. Just because you are eligible to apply for a VA mortgage does not mean you will be approved for one; the lender must review your credit qualifications to make sure you are a good risk and that is in spite of the government guarantee on the loan.
The government promises to repay a portion of the VA loan should you default, but it does not promise to repay the whole thing.