VA loans provide an array of significant homebuying benefits for qualified borrowers, from no down payment or private mortgage insurance to consistently lower interest rates.
But one of the biggest benefits of all — more relaxed credit score requirements — can also prove one of the most confusing, especially for first-time buyers. That’s in part because what the VA requires and what lenders need can sometimes be different.
The VA doesn’t require borrowers to meet any credit score requirement. But the government also doesn’t make home loans. Rather, it basically insures a portion of a loan made by a private approved lender.
That financial guaranty gives lenders confidence to extend financing to borrowers with no down payment, competitive interest rates and other big-time benefits. But private lenders are still on the hook for the bulk of the loan if a homeowner defaults.
To help mitigate risk, lenders will often have additional requirements that can go above and beyond what the VA needs to see. Having a credit score benchmark is among the most common.
Credit Score Benchmarks
Right now, VA lenders are typically looking for a credit score of at least 620. That’s considered a “Fair” credit score, which is a step below “Good” and two below “Excellent,” according to FICO. So the idea that VA loans require anything near perfect credit isn’t remotely close to true.
But how does that 620 score stack up against other loan programs?
Incredibly well. In fact, that “Fair” credit score benchmark represents another significant benefit of VA home loans.
The average credit score for a successful conventional purchase loan was 755 in February, according to mortgage software firm Ellie Mae. For FHA loans, the average score was 686.
In addition to the higher credit scores, both conventional and FHA loans have minimum down payment requirements (typically 5 percent and 3.5 percent, respectively). Borrowers who can’t muster a 20 percent down payment will have to spend additional money each month for mortgage insurance.
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Chris Birk is executive editor of Veterans United Home Loans.