The Minimum Credit Score for a VA Loan: A Judgment Call
The VA does not impose minimum credit score requirements on borrowers.
Many borrowers worry about meeting the minimum credit score for a VA loan, but, in fact, eligibility is up to the discretion of the mortgage underwriter who actually reviews an applicant's complete credit history and uses his or her best judgment when deciding whether to approve a loan. For example, if an applicant has several unpaid collections – no matter how long ago they were established – underwriters may question the borrower's ability and willingness to stay current on any newly-approved loans. However, if the borrower and/or spouse are found to be satisfactory in their credit rating, despite any negative credit information, an explanation from the applicant(s) and the lender's underwriter about the reason a specific loan determination was made should subsequently be put in their mortgage file. If lenders are not sure how to make a determination on a particular matter, they can contact the appropriate VA Regional Loan Center for help.
However, lenders may make their own judgment calls about the needed minimum credit score for a VA loan. While minimum scores of 620 – 660 are typically common, the average FICO score is 708 for applicants approved for VA mortgages. If a low credit score is a concern, applicants can ask the lender about minimum requirements up front. If they do not meet these requirements, they may want to keep on looking for other lenders that may better assist them in obtaining a loan.
The VA has shown flexibility in its treatment of other credit factors, but individual lenders may not be as flexible or handle these issues differently. These factors can include:
Credit counseling- some lenders look at credit counseling the same way they do Chapter 13 bankruptcy, while other lenders see it as a proactive step toward improved financial management, and thus a positive attribute. The VA falls into this latter category, stating, "If a veteran, or veteran and spouse, have prior adverse credit and are participating in a Consumer Credit Counseling plan, they may be determined to be a satisfactory credit risk if they demonstrate 12 months' satisfactory payments and the counseling agency approves the new credit."
As well, in the case that a veteran or a veteran and spouse have good prior credit but are participating in a counseling plan, that participation should be considered a neutral or positive factor when deeming creditworthiness, according to the VA. Participating in a program should also not be treated as a negative factor if the VA applicant began credit counseling prior to the establishment of bad credit.
Bankruptcy – The VA is fairly generous when it comes to assessing a bankruptcy filing on an applicant's default risk. "The fact that a bankruptcy exists in an applicant's (or spouse's) credit history does not in itself disqualify the loan."
Underwriters are directed to disregard Chapter 7 bankruptcies that are more than two years old; applicants who have bankruptcies that were discharged at least a year ago could also be found eligible for financing, particularly if they can show they have obtained any new credit and made satisfactory payments on that and "the bankruptcy was caused by circumstances beyond the control of the applicant or spouse such as unemployment, prolonged strikes, medical bills not covered by insurance, and so on, and the circumstances are verified"
Chapter 13 bankruptcies are treated with even more leniency. In fact, after they are discharged they are disregarded. Lenders may even give applicants favorable consideration if they show they have made at least a year's worth of satisfactory payments and approval of the new credit is granted by the trustee or the bankruptcy judge.
Foreclosure – Foreclosure does not necessarily keep applicants from being approved for financing, according to the VA. In fact, lenders are to use the same guidelines they use for assessing a bankruptcy filing when making determinations about eligibility. This can include looking at reestablished credit and the causes for bankruptcy.
"Real life" credit guidelines
Applicants may need to reach out to a number of different VA-approved lenders before finding one that adheres to VA guidelines without imposing even stricter rules.
One more credit issue: CAIVRS
However, applicants should know there is one non-negotiable credit issue for VA and other government mortgages that is called the CAIVRS check. This Credit Alert Interactive Verification Reporting System database contains the names of people who have defaulted on federally-guaranteed debts, including student loans; who have outstanding tax liens; or who have any other type of obligation to the federal government. A lender has to check this database for the names of all applicants for mortgages. If an applicant's name is on the list, they will not be allowed to close on a government-backed mortgage until they have cleared up the reporting errors or resolved the debt, which in many cases, may be done by establishing a payment plan.