If you’re a veteran or a service member, you may have heard about the excellent benefits of VA loans. These loans are designed to help you achieve the dream of homeownership or refinance your existing home. However, one critical factor that determines your eligibility for a VA loan is your credit score. In this article, we will explore the minimum VA loan credit score requirements for both home purchases and refinancing.
What are VA Loans?
VA loans, short for Veterans Affairs loans, are a mortgage option available to active-duty military personnel, veterans, and certain members of the National Guard and Reserves. These loans are backed by the U.S. Department of Veterans Affairs and are offered by private lenders, such as banks and mortgage companies.
What Are VA Loan Credit Score Requirements?
VA loans are a fantastic benefit for veterans and service members, but what credit score do you need to qualify for one? The answer depends on whether you fall under the “approve/eligible” or “refer/eligible” category, as well as your specific financial situation.
VA Approve/Eligible Purchase Or Refinance
If your VA loan application receives an “approve/eligible” status, it means you’ve been approved through an automated government underwriting system. To qualify under this category, you typically need a minimum median FICO® Score of at least 580.
However, if your credit score falls between 580 and 619, there are strict requirements concerning your housing expense ratio. This ratio is calculated by dividing your mortgage payment (including taxes, insurance, and homeowners association dues) by your gross monthly income, expressed as a percentage. To be eligible, you must ensure that your housing expense does not exceed 38% of your income before taxes if your credit score is below 620.
Another factor considered is your debt-to-income ratio (DTI), which calculates your monthly payments for installment debt and minimum payments on revolving debt (e.g., credit cards) as a percentage of your gross monthly income. If your credit score is below 640 and your down payment is less than 5%, your overall DTI, including your mortgage payment and all other debts, should not exceed 45%. However, if your score is 620 or higher, the focus shifts to DTI, and the qualifying threshold becomes more flexible.
VA Refer/Eligible Purchase Or Refinance
In cases where the VA’s automated system doesn’t approve your application, you might still have a chance through the “refer/eligible” route, which involves manual underwriting. A human underwriter will carefully review your documentation to determine your eligibility.
Borrowers who don’t qualify for automated approval often have certain negative items in their credit history, such as late mortgage payments, past bankruptcies, or foreclosures. To secure a VA loan in the “refer/eligible” category, you typically need a minimum median FICO® Score of 640 or higher, and your DTI should not exceed 45%. For refinancing, it’s essential to maintain at least 10% equity in your home.
VA Jumbo Loans
While the VA itself does not establish specific loan limits, lenders often categorize loans as “jumbo” when they carry a higher risk. In most cases, these jumbo limits align with the conventional loan limits in a particular area. For areas outside high-cost regions, the current conventional loan limit is $726,200. Anything exceeding this threshold qualifies as a VA jumbo loan.
With full VA entitlement and a qualifying credit score of 640 or higher, you can purchase a home with no down payment or refinance up to the full amount of your equity for loan amounts of $1.5 million or less. If you’re considering a loan exceeding this amount, you’ll typically need a 10% down payment or equity amount and a median credit score of 680 to secure a VA loan of up to $2 million.
Why Are VA Loan Requirements for Credit Scores Less Strict?
VA loans stand out for their flexibility when it comes to credit score requirements. But why are the requirements less strict compared to conventional loans or other mortgage options? The primary reason behind this leniency is the backing of VA loans by the U.S. Department of Veterans Affairs.
This government support provides a safety net for lenders, allowing them to offer more forgiving credit terms to veterans and service members. VA loans are designed as a benefit to those who have served their country, and the government aims to make homeownership more accessible for them.
Additionally, the strong credit performance of VA loans over the years has given lenders confidence in the program’s reliability, further reducing the need for stringent credit score requirements. This, in turn, empowers veterans and service members to achieve their homeownership dreams with greater ease, even if they don’t have a perfect credit history.
Additional VA Loan Requirements
In addition to credit score considerations, VA loans have a few other requirements that applicants must meet. These requirements include proof of military service, a satisfactory debt-to-income ratio, and a valid Certificate of Eligibility (COE). To obtain a COE, veterans need to provide specific documents depending on their service history. The property being purchased must also meet the VA’s standards for safety and livability. While these requirements may seem detailed, they are in place to ensure that VA loans continue to serve veterans and service members as a valuable path to homeownership.
Who Can Use a VA Mortgage Loan?
VA mortgage loans are designed to benefit a specific group of individuals, including active-duty service members, veterans, certain members of the National Guard and Reserves, and some surviving spouses. Eligibility is determined by the length and nature of military service, and it’s crucial to verify your eligibility status with the U.S. Department of Veterans Affairs or a VA-approved lender. These loans serve as a gesture of appreciation to those who have served their country, providing them with an opportunity to achieve their homeownership goals.
What Benefits Come With a VA Loan?
VA loans offer a range of appealing benefits to eligible borrowers. These advantages include the potential for a zero-down payment, competitive interest rates, no requirement for private mortgage insurance (PMI), and lenient credit score requirements. Additionally, VA loans may allow for more flexible underwriting and provide the opportunity for refinancing to reduce monthly mortgage payments. These benefits collectively make VA loans an attractive and cost-effective option for those who qualify, offering a path to homeownership with distinct advantages.