This post was inspired by VA Loans Insider reader Mary Ann Parker, who asked about securing VA financing with less than perfect credit. In fact, one of the most common questions we receive is: Can I get a VA loan with bad credit?
The answer isn’t black-and-white, in part because there’s no clear-cut definition of what “bad credit” actually means. For VA loans, borrowers will often need a FICO credit score of at least 620. But the VA doesn’t mandate a minimum score requirement, and credit score benchmarks can vary by lender.
Some lenders may be willing to go below that common 620 cutoff, which is considered by some to be the dividing line between “Fair and subprime credit. The latter category is often regarded as “bad credit,” although ranges and definitions vary.
Credit Benchmarks for VA Loans
The first issue is tackling nebulous phrases like “bad” or “less than perfect.” We use that kind of language because it can be so tough to discern what constitutes “good” credit, or at least a credit score that can get prospective buyers closer to the dream of homeownership.
The reality is there isn’t one credit score. Lenders will look at a range of scores — weighted a bit differently for the mortgage industry — from the different credit reporting agencies and generally focus on the middle ground. You can read more about what goes into different types of credit here.
For now, we’ll just focus on the bottom line: What kind of credit score do you need right now to move forward with the loan approval process?
Current VA Lending Environment
The VA doesn’t have a credit score requirement. Instead, the agency simply requires prospective borrowers to be considered a “satisfactory credit risk.” It defines the phrase a bit but it’s still rather wide open.
But it’s also not the VA lending you money. The agency basically insures a portion of the mortgage. It’s VA-approved lenders who are on the hook for the bulk in the event of default. They want to insulate themselves from risk as much as possible, and one way they do so is by requiring borrowers to hit a specific credit benchmark.
In today’s lending climate, most VA lenders require a score of at least 620. If your spouse will be obligated on the loan, he or she will need to hit the same benchmark.
The average FICO score for VA borrowers is 709, compared to 750 to 770 scores for conventional loans backed by Fannie Mae and Freddie Mac, respectively, according to syndicated columnist Ken Harney.
Less Than Perfect?
So what about Mary Ann’s question?
It really depends on how you define “shaky” or “less than perfect” credit. You can certainly have blemishes on your credit report and maintain at least a 620 score. You can even have a history of bankruptcy or foreclosure and still obtain a VA loan.
But right now, in most cases, you’re going to need a credit score of at least 620 in order to secure financing. If you need help boosting your score, check out our Lighthouse Program, a unique arm of Veterans United that works with service members to overcome financial challenges and get on the path to loan prequalification.
Photo courtesy of Moyen_Brenn