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Lesson 2.4

What Kind of Credit Do I Need?

Tim Alvis | Credit Expert | NMLS #373984

Credit Score Benchmarks

Credit score requirements are a fact of life in the mortgage industry. Regardless of the type of loan you’re seeking, you’ll typically need to meet a lender’s minimum credit score in order to secure home financing. These cutoffs can vary depending on the lender, the loan type and your specific financial situation.

The good news is VA loans feature more flexible and forgiving credit guidelines than other loan types. In fact, the VA doesn’t enforce a credit score minimum in order for veterans to utilize the program. Instead, it requires borrowers to be a “satisfactory credit risk.”

But the VA doesn’t actually make home loans. Instead, the VA loan program basically insures a portion of each loan issued by a mortgage lender. The lender takes on the bulk of the risk with each loan. Because of that, lenders are allowed to tack on requirements and standards that go beyond what the VA wants to see.

You’ll often hear these additional requirements called “overlays.” A credit score requirement is among the most common.

Different lenders can have different credit score cutoffs. But a 620 FICO score is a pretty good barometer for many VA lenders. For a conventional loan, it’s often more like a 660 minimum score, although to get the best rates and terms you may need at least a 740 FICO.

It’s important to know, too, that everyone on the loan will need to meet the lender’s credit score requirement. We’ll talk more about co-borrowers and who can be on a VA mortgage with you in a later course.

The “Perfect Credit” Myth

Let’s try to put that 620 score minimum into perspective. There’s a common misconception that you need great or even perfect credit for a VA loan.

Check out where a 620 score typically falls in the grand scheme of credit scoring:

What's a "Good" Credit Score?
Credit Score Category
300-549 Poor credit
550-619 Subprime
620-679 Fair credit
680-740 Good credit
740-850 Excellent credit

Obviously, you don’t need anything near excellent credit to land a VA loan. The reality is you don’t even need what’s often considered “good” credit, although working hard to boost your score is definitely in your best interest.

Consumers with higher scores are often in a better position to land a lower interest rate, which can save you thousands of dollars over the life of a loan.

Stronger credit can also encourage a lender to overlook other shortcomings or potential issues with your loan file. Lenders can consider a strong credit profile as a “compensating factor” that can help a borrower overcome things like a higher debt-to-income ratio.

Credit scores are a vital part of VA loan eligibility, but many other factors will also be considered. Lenders will take a careful look at your income, employment history, debt-to-income ratio and more before you can be approved for financing.

Bankruptcy & Foreclosure

Negative financial events like a bankruptcy, foreclosure or short sale can also have an impact on your ability to qualify for a VA home loan. Each of these things can hurt your credit score. Beyond that, borrowers who’ve experienced one or more of these may need to wait a certain period of time before being able to pursue a VA loan.

But VA loans are also more flexible and forgiving than other loan types when it comes to things like bankruptcy, foreclosure and short sales.

You may be eligible for a VA loan just:

  • One year removed from filing a Chapter 13 bankruptcy
  • Two years from the discharge of a Chapter 7 bankruptcy
  • Two years following a foreclosure or short sale

In comparison, it’s typically a four- to seven-year wait for a conventional loan following any one of these negative events.

Some lenders, including Veterans United, have no required waiting period following a short sale in most cases. It's important to note that FHA homeowners may face a three-year wait in the event of a short sale or foreclosure.

When it comes to VA loans, that same spirit of flexibility holds true for credit scores and credit history in general. One of the biggest benefits of VA loans is they allow for lower credit scores than other financing types.

That flexibility can make a tremendous difference for veterans, service members and military families, especially considering the other benefits of VA loans, chiefly the ability to purchase with $0 down.

The one-two punch of lower credit standards and no down payment helps open the doors of homeownership to scores of people who might otherwise struggle to obtain home financing.

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With Chris Birk,
Author of The Book on VA Loans