Not every service member or Veteran has perfect credit or an 800 credit score. Actually a very small percentage of Americans achieve this score. Luckily VA loans are reasonably forgiving when it comes to credit scoring. Therefore this flexibility along with the ability to buy a home with no money down makes VA a great financing option. So a popular question that comes up in the application interview is “What is the minimum credit score for VA loan?”.
Minimum Credit Score for VA Loan
First of all, keep in mind that a VA loan credit score is not all that matters. For instance, someone may have a 680 credit score but had a foreclosure a month ago. But credit scores are a requirement and they are a good starting point. Each VA lender has different requirements, but our minimum credit score for VA loan is 600. So if you have a 600 credit score, will you automatically get approved? Not necessarily. Remember, credit scoring is a starting point but it is certainly possible with explanations and established good credit.
Using Alternative Credit on a VA Loan
A good thing about a VA loan and our underwriters is that not all credit must show on the credit report. So let’s say that a Veteran has a 620 credit score and only has 1 student loan reporting on credit recently. If this one credit trade line has been paid as agreed, alternative credit could help. Supplementing other credit references not found on the credit report may show an ability to repay. There are a lot of alternative credit options listed below
- Utilities. Gas, water, electric, cable, telephone
- Insurances. Car, renters, health, disability
- School tuition
- Cell phone
- Rent to own accounts
- Consistent savings account deposits
- Small store accounts
- Online services: Recently we used Xbox Live for credit
Keep in mind that above alternative credit sources paid directly from a paycheck do not count. Alternative credit must be paid outside of a paycheck. So payroll deducted health insurance would not count.
Recent VA Loan Success Story – Recent Bankruptcy & Used Alternative Credit
The other day we closed a VA loan that had the following scenario
- Discharged from chapter 13 bankruptcy 2 months prior to application
- Credit report showed only one new loan paid on time for 12 months
- Proved on-time bankruptcy pay history
- Used an insurance payment and an Xbox Live history to prove alternative credit
- Verified 12 months rent history with cancelled checks
For this Veteran, an approval makes sense. He had an issue in the past, had a good explanation for what happened, and proved re-established credit. There were other things used to help get the approval as well. The biggest was grossing up the VA disability income which is nontaxable. Nontaxable income such as VA disability is not taxed by the federal government. So actually in this case, using a higher figured lowered his debt ratio within guideline parameters. Anyone can close an 800 credit score, strong borrower. But we love helping Veterans and service members that have experienced a hardship. We will put in the extra effort to help you buy a home even if barely at the minimum credit score for VA loan.
Rent Verification for VA Loans With Low Scores
For lower credit scores on VA or any other type of mortgage loan, rent or mortgage history is very important. A previous housing history is a good indicator of how someone will pay a new house payment. So lenders take rent very seriously. The most weight is given to a rent history proven by cancelled checks. Then a buyer proving on time payment history through checks shows the buyer is the one who actually made the payments. Plus it shows they were made on time and there is no disputing this. Next, rent payments verified through a rental company is good. The weakest would be rental payments made to an individual. In cases where payments are made to individuals, additional documentation may be required. For instance, cancelled checks or proof of withdrawal from a bank account for 12 months would help.
Keep in mind, using alternative credit is not a way to ignore a bad credit report or score. Alternative credit is a way of proving a more solid or in depth payment history than the credit report shows.
VA Loan Manual Underwriting Approval
Often lower credit scores mean lenders may not receive an automated underwriting approval. Usually automated preapprovals are used as a guide for underwriting the file. But lower scores or a recent major event such as foreclosure or bankruptcy may require manual underwriting. We have great successes in helping buyers get approved with limited credit or low scores. Therefore manually underwritten loans have the following characteristics:
- Maximum debt ratios are held to 43%
- Assets improve approval chances
- Co-borrowers other than spouse may not be added
- Alternative credit (see above)
- Rent history
- Detailed credit explanations – what caused the issue, how did you remedy, & what have you done to re-establish?
Are you working with a Realtor and know you may need help qualifying, mention us. We can often approve buyers for a VA loan when over a 600 score. Although, the higher the score, the better chance of approval. So if you have limited credit, but can provide sufficient documentation above, contact us to apply for a VA home loan approval. We hope this helps in understanding the minimum credit score for VA loan requirements.
Secret to Fast VA Loan Approval Up-Front
- Signed and dated Statement of Service Letter (Ask us if we need it though)
- DD214 (if no longer in the military)
- Current LES
- Most recent W2 and Tax Return
- Most recent bank statement (all pages of actual monthly statement)
- Photo identification
- Military transfer orders – if transferring to a new base
We will request your COE, status report, complete your application, and discuss your mortgage options. Our goal is to have educated, confident, and approved buyers!
Author: Russell Smith
Team Move OVM Financial loan officer success is Russell’s primary focus. He provides the tools and techniques he used as a top producing loan officer. Additionally he offers the Team Move OVM Financial Agent Training Program. Sharing is so important to Russell so he works diligently to be a resource to loan originators and Realtors.