Most home mortgages look at your credit score before anything else. If your score doesn’t meet their requirements, they don’t work with you. However, with the VA loan, there isn’t a
minimum score you must meet. According to the VA, you must have ‘suitable credit’ along with enough income to cover the mortgage and your overall bills. That’s a pretty ambiguous number, right?
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Don’t worry, it’s not as complicated as it seems. The VA sets their minimum requirements, which each lender must abide by. However, each lender then has the ability to add to those requirements as they see fit. This means you might see one lender that requires a 620 score while another requires a 680 score.
If we were to sum up the average of what most lenders require, though, it’s a 620 score.
What Else Does the VA Look At?
So the VA doesn’t have a specific credit score you must have, what do they care about? Honestly, they focus mostly on the fact that you have enough money to cover your bills and have money for daily living. Their main focus is on the disposable income you have each month. They have a specific algorithm they use that calculates just how much a family of each size in different areas of the US need in order to survive comfortably. If you meet those requirements, the VA considers their requirements met.
But, that doesn’t mean that’s all that lenders look at on your VA application. Most lenders look at your actual debt ratio too. According to the VA, your total debt ratio cannot exceed 43%. But, many lenders have their own say regarding the housing and total debt ratio. Some lenders go by the FHA guidelines of 31/43, while others have their own requirements.
Finally, lenders want to see that your
income and employment are steady. They’ll likely ask for a 2-year history of your income and employment. If you didn’t change jobs in that time and your income remained steady or increased, you are in a good position. If, however, you changed jobs or your income decreased, you may have some explanations to make.
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What if You Don’t Qualify?
If your credit score is too low and several lenders turn you down, you still have an option. It requires a little work, but you can improve your credit score. Did you know that scores change on a monthly basis? Just a few positive changes could help yours increase quickly. Of course, it depends on the reason for the low score.
A few good examples include:
- Late payments – Bring all of your accounts current and keep a timely payment history moving forward.
- High credit card balances – Pay your credit card balances down as much as you can. This will free up your
credit utilization rate, which will increase your score eventually.
- Too little credit – Sometimes a low credit score is due to insufficient credit. You may want to take out a secured credit card or become an authorized user on someone else’s card to help boost your own credit.
What to Expect
The VA’s guidelines are rather vague. Most lenders will add their own requirements to make sure you are a good risk. It makes sense since lenders are taking a big risk giving you 100% financing with very little evaluation of your risk level.
The lenders are the ones that fund the loans – not the VA. Rather, the VA provides the guarantee that they will pay the lender 25% of your loan amount should you default. This is still a pretty big risk for lenders, which is why they have to put their own overlays onto this to make sure you are a good risk.
In the end, the VA loan is a very versatile and flexible program. If you are a veteran with eligibility for the program, consider looking into your chances of getting this lucrative loan. If you have questionable qualifying factors, remember that you may have to shop around to find a willing VA approved lender.
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