Once upon a time, when a veteran wanted to use the VA loan benefit to finance a home with nothing down, the VA would ultimately approve the loan application. The VA would only just issue the approval, but also order the appraisal and set the VA interest rate.
As a result, it often took quite some time to get a loan approval from the VA. For this reason, sellers frequently refused offers if the buyers were using VA loans. It simply took too long.
After the 2008 financial crisis, however, there was a concerted effort to streamline and simplify the VA home loan process. This included reducing paperwork, standardizing procedures, and improving communication between lenders and the VA.
On top of that, in general starting in the 2000s, advances in digital tools and online platforms began significantly speeding up the VA loan approval process.
Lenders and the VA can now process applications, verify eligibility, and approve loans much more quickly.
Also, today, the VA itself doesn’t approve the loan. The approval process is instead performed by approved VA lenders.
What Role Does the VA Play in the Home Loan Process?
The VA still plays a role, of course – most significantly, in setting the requirements lenders must follow to receive the VA loan guarantee.
However, many aspects of the VA home loan approval process – such as debt ratios, employment history, and the borrower's creditworthiness – are largely up to the lender.
The VA provides a guarantee to lenders for a portion of the loan, which reduces the lender’s risk and can make it easier for borrowers with less-than-perfect credit to qualify.
So what are some of the common credit requirements and considerations for VA loans?
VA Loan: Credit Score Evolution
Most lenders require a minimum credit score between 620 and 640 for VA loans. This number is taken from the borrower’s FICO number, which ranges from 300 to 850. The higher the number, the better the credit.
Some lenders may require higher credit scores, especially if the borrower has other risk factors such as high debt-to-income ratios.
Borrowers with lower credit scores may still qualify if they have strong compensating factors, such as a large down payment, significant savings, or a low debt-to-income ratio.
The three main credit agencies, Experian, Equifax and Transunion, all use the FICO model and report their scores to a VA lender when asked. For each borrower, the FICO numbers from the three agencies will be similar to one another but rarely exactly the same. Typically, the lender will use the middle score.
Your approval also depends on the amount of the mortgage. With VA loan amounts no longer capped by law, lenders have leeway to approve veterans for large home loans. But of course, this is dependent on your creditworthiness.
Different lenders have different credit requirements, so it can be beneficial to shop around and find a lender that is willing to work with the borrower’s credit profile.
You can use a VA loan calculator to check what you might qualify for.
Related: Demystifying Costs Associated With Your VA Loan
Debt-to-Income Ratio (DTI), Income Stability and More
While the VA recommends a DTI ratio of 41% or less, lenders may have their own DTI requirements that borrowers must meet.
Lenders will assess the borrower’s employment history and income stability to ensure they can reliably make their mortgage payments.
Additionally, the VA requires borrowers to have a certain amount of residual income (income left over after all major expenses and debts are paid) to ensure they can cover living expenses. This requirement varies based on the borrower’s family size and geographic location.
Bankruptcies, Foreclosures and VA Loans
While a bankruptcy or a foreclosure can stay on your credit report for seven years, you don’t necessarily have to wait that long to use your VA home loan benefit.
In fact, in the instance of a foreclosure, you may qualify after two years. However, if you used your VA entitlement and it was involved in the foreclosure, the amount of the entitlement in the foreclosure must be redeemed.
VA loans allow for a bankruptcy in the past as long as one or two years have passed since the discharge date and credit has been re-established (depending upon the type of bankruptcy). A lender will have a difficult time approving a VA loan if there was even one late payment over the past two years.
The most important payment to keep current is your rent in addition to your utility payments and mobile phone bill. Some VA lenders can use such payments as evidence of timely payment as "alternative" credit. A bankruptcy or a foreclosure will hurt your scores, but eligible veterans can repair the damage to the credit report sooner rather than later.
It’s essential to work on maintaining a good credit profile and seeking pre-approval to identify and address any issues early on.
VA Loan: When in Doubt, Ask a Lender
If you're navigating the process of re-establishing your credit after a bankruptcy or foreclosure or simply aren't sure if your credit will suffice for a loan, the best way to get an answer is to use our VA loan finder to see if you qualify for a loan. If so, the lender will be happy to address your questions and guide you through the process.
