Get a VA Loan With a Credit Score Under 600 FICO
In this blog, we will cover how to get a VA loan with a credit score under 600 FICO. Many borrowers often get denied by mortgage lenders on VA loans due to low credit scores. Most mortgage lenders will require a minimum of a 620 credit score on VA loans. Other lenders will require a 640 FICO. So who is right and why do lenders have to confuse veterans and not have a uniform credit score requirement? The fact is the U.S. Department of Veteran Affairs does not have a minimum credit score requirement on VA loans.
VA Loans For Low Credit Scores
The team at Gustan Cho Associates are experts in originating VA loans with credit scores down to 500 FICO. Getting a VA loan with a credit score under 600 FICO and a debt-to-income ratio surpassing 60% debt-to-income ratio on a manual underwrite is not an uncommon thing at Gustan Cho Associates Over 80% of our clients are folks who could not qualify at other lenders due to a last minute mortgage loan denial. Mainly, borrowers got a last-minute mortgage loan denial because the lender had overlays.
Can I Get a VA Loan With a Credit Score Under 600 FICO?
The VA, The Veterans Administration, offers loans to military veterans, active duty members, and their surviving spouses. These loans can be no money down and no closing costs as well. A VA loan can be available with longer loan terms, may not need Private Mortgage Insurance (PMI), and lower interest rates. A lender gives a VA loan. Still, the VA will back the mortgage up to a certain amount, encouraging lenders to provide loans for individuals who might not meet the qualifications for a conventional or qualified mortgage.
Qualifying For a VA loan With a Credit Score Under 600 FICO
For individuals who are currently serving in the military or veterans who were honorably discharged, more than six years of National Guard or reservist service, the service must include 90 consecutive days of active service during a war or at least 181 consecutive days of active service during peace, or be a surviving spouse of a service member killed in the line of active duty. In order to qualify for a VA loan, you will need a VA COE (VA Certificate of Eligibility), meet the lenders’ standards for credit and income, and live in the home you are buying.
VA Loans For Bad Credit Guidelines
The Veterans Administration does not set credit scores to their qualifications. These are set by the lenders. Your credit score will not necessarily qualify or disqualify you for a VA loan; the lender’s requirements determine it. Your credit is one of many components that a lender will assess for your approval. Your debts, income, and employment history will be reviewed along with your credit score.
What Does Bad Credit Mortgage Loans Mean on VA Loans?
If your credit is 600 or better, your chances of qualifying for a VA loan are great. Most lenders require a 580 or better, depending on their requirements. You will be eligible for better interest rates with a 600 or better credit score.
Manual Underwriting Guidelines on VA Loans
When you have a lower credit score, you may need manual underwriting. This means that the Automated Underwriting System will disqualify you. If you use manual underwriting, a professional underwriter will go through your finances and see if you qualify. This is a lengthier process but offers more opportunity for approval due to taking into account any compensating factors. VA and FHA are two of the loans that allow for manual underwriting. The maximum debt-to-income ratio recommended for manual underwriting VA loans depends on compensating factors.
What Are Compensating Factors For VA Loans?
Compensating factors are positive factors that reduce and offset the layered risk of the mortgage lender. Not all positive factors can be used and counted as compensating factors. The line items below are the list of compensating factors that is acceptable for VA and VA loans. Below is a list of acceptable compensating factors mortgage lenders will count on manual underwriting.
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- If the borrower has shown a history of saving money.
- The borrower has a good job history, longevity, or promotions.
- The borrower has cash reserves of at least three months
- There is a non-borrowing spouse with a full-time job
- Two years out of foreclosure, short sale, or bankruptcy
- Low Shock Payment, less than 5%
- A Large Down payment
How Can I Qualify For VA Loan With a Credit Score Under 600 FICO
Before applying for a VA loan, you need to take a look at your credit score, so you know what you need to work on. Knowing that a lower score will impede your chances of getting a lower interest rate and also, in some cases, disqualify your chances of getting a loan at all. Ways to improve your credit:
- Make payments on time.
- If you have delinquent or missed payments, it will have a significant impact on your credit score.
- If you run into problems, you can contact the debtor to see if you can work out a payment plan before it affects your credit.
- Most creditors will work with you.
- Dispute any charges that are not accurate, but do not dispute during the mortgage process.
It would be best if you started a dispute well before you applied for a mortgage, as this can take some time. If the incorrect charge is over two years old, it will not likely affect your credit.
Improve Your Credit Score to Improve your Interest Rate
Do not close any old credit cards. The longer you have had a line of credit, the better it looks. Get a secured credit card. These run reports to the credit bureau, so if you are responsible while using the card, it can help improve your score. Look at your credit utilization, which is the amount of debt you have on your credit cards vs. how much you have not used. You should not have maxed out cards. Other than a secured card, limit the number of new accounts you apply for.
VA Loan Guidelines After Bankruptcy and Foreclosure
If you are applying for a VA loan and have a bankruptcy or foreclosure on your credit report, you will have to meet a couple of requirements. This can complicate your approval process. If you have Chapter 13 Bankruptcy, you must have made on-time payments for at least 12 months before applying. For Chapter 7, you will need to wait two years.
If you have experienced a foreclosure, you would need to wait two years before applying for a VA loan. There are instances where you can apply sooner, such as reestablishing good credit. However, if you have a lower credit score and these significant dings on your credit report, it will definitely make it more challenging to get approval.
Mortgage Lenders Who Work with Borrowers with Low Credit Scores
Since the VA does not set a credit score minimum, it all lies in the hands of the lender. These requirements can vary significantly from lender to lender. A lender overlay is additional requirements that banks etc., put into place on top of the VA requirements. Because each lender can set their own guidelines, it pays to shop around and find a lender who specializes in low credit score VA loans. Because the VA backs the VA Home Loan, lenders have the ability to work with individuals who have lower scores which would be considered high-risk borrowers without the backing.
Frequently Asked Questions (FAQs)
- Q: Is it possible to obtain a VA loan with a FICO credit score below 600?
A: While obtaining a VA loan with a credit score below 600 FICO is possible, borrowers may encounter challenges, and eligibility requirements may vary among lenders. - Q: What credit score is required for a VA loan?
A: The Department of Veterans Affairs does not establish a set minimum credit score requirement for VA loans.. However, many lenders have their own credit score criteria, typically ranging from 580 to 620 FICO. - Q: Is it possible to be eligible for a VA loan with an alternative credit history?
A: Yes, borrowers with limited traditional credit history may still be eligible for a VA loan by providing alternative credit references, such as rent payments, utility bills, or other recurring expenses. - Q: What factors besides credit score are considered for VA loan approval?
A: Lenders assess various factors, including income stability, employment history, debt-to-income ratio, and residual income, in addition to credit score, to determine VA loan eligibility. - Q: Are there options to improve credit scores before applying for a VA loan?
A: Yes, borrowers can improve their credit scores by ensuring timely payment of bills and reducing outstanding debts, disputing inaccuracies on credit reports, and avoiding new credit inquiries. - Q: Can a cosigner help qualify for a VA loan with a low credit score?
A: In some cases, having a cosigner with a stronger credit profile may increase the likelihood of VA loan approval, but lenders’ policies regarding cosigners vary. - Q: What assistance is available for veterans with credit challenges?
A: Veterans facing credit challenges can seek guidance from VA-approved housing counselors, financial advisors, or nonprofit organizations offering credit counseling services to explore options for improving credit and achieving homeownership.
In summary, just because you have a low credit score doesn’t mean that you will be disqualified from a VA loan. The Veterans Administration made the loan program for individuals and their families who have served the country and veterans deserve this opportunity. Find a lender who is willing to work with you and get you home!
