Military buyers do not need a squeaky clean credit report to qualify for VA financing. The purpose of the VA home loan program is to help as many military buyers as possible with a practical buying process.
First, the Department of Veterans Affairs (VA) does not issue loans. Instead, the department oversees the program and guarantees a portion of each loan in case of default. Because the VA does not issue home loans, they also do not enforce credit score minimums. The VA does require perspective buyers to be considered a “satisfactory credit risk.”
USAVA lending will allow a mid credit score as low as 500 (with compensating factors). Because the VA backs a portion of the loan, lenders are allowed to provide borrowers with more favorable terms. Applicants with mid credit scores below 500 usually can’t be approved for VA financing unless it is for a VA IRRRL. Minimum credit score will vary among other lenders.
Lenders take a look at FICO scores to determine the risk of the loan going into default. FICO scores focus on the last two years and are broken down into five categories.
A FICO score is determined by assessing the following:
- payment history (35 percent)
- account balances (30 percent)
- credit length (15 percent)
- credit types (10 percent)
- credit inquiries (10 percent)
Most importantly, a credit score helps lenders ensure that a borrower is not given a loan he or she can not afford to pay back.
Low or poor credit scores can be improved by:
- keeping up with payments
- paying back any creditors
- not applying for anymore credit
- maintaining all credit card balances below 20 percent of their limit
Potential borrowers with low credit scores may choose to add a co-signer to help get approved.
If you are an eligible veteran and find yourself needing a co-signer, eligible co-signers may include:
- a legally married spouse
- an unmarried military member or
- an unmarried non-military member *certain restrictions apply.
Having a spouse as a co-signer may be beneficial if said spouse has acceptable credit scores and debt-to-income ratio. A spouse may even help a veteran qualify for a larger loan. If the co-signer is not a spouse, his/her income may NOT be used for qualifying purposes unless they are blood related and will occupy the home.
If the co-signer is not an unmarried military member or a legal spouse, there are certain restrictions that apply. Having only one VA approved co-borrower means a lender will only have a portion of the loan backed by the VA. The VA only guarantees the dollar amount of the veteran’s interest in the property. Usually, this option means a down payment will be required.
If you are interested in applying for a VA home loan and are not sure about your credit scores, contact a USAVA Lending professional 888-842-0490 to get you on the right path to home ownership.
