What Kind of Credit Do I Need?
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 at least that, 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.
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.
Read more: Getting a VA Loan After Bankruptcy
Read more: Getting a VA Loan After Foreclosure
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.
VA Loans & Credit Flexibility
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.