In the past when a veteran wanted to use the VA home loan benefit in order to buy and finance a home with nothing down, the VA would ultimately approve the loan application. The VA would not just issue the approval but order the appraisal and set the VA interest rate for the loan. You can imagine the time it would take just to get a loan approval from the VA and one of the reasons many sellers at times would refuse an offer on a home if the buyer was using a VA loan for the purchase—it simply took too long.
Today however, the approval process is completely performed by approved VA lenders. The VA doesn't approve the loan but does issue the requirements that lenders must follow if the lender expects to receive the VA loan guarantee. From debt ratios to employment history, it's all up to the lender. And that of course includes the creditworthiness of the borrower. What are the credit requirements for a VA loan?
Credit Score Evolution
Prior to the introduction of credit scores, a VA lender would review a credit report line item by line item to manually evaluate a credit report. The credit report contains information about a trade line, how much is owed, the monthly payments and whether or not the payments were made more than 30, 60 or 90 days late. The report also listed any outstanding or paid collection items, charge-offs and judgments. If the underwriter saw any derogatory credit, unless it was a missed payment or two, the loan would likely be declined.
The FICO company devised a complex analysis of payment patterns to produce a three digit number reflecting a borrower's credit past as a way to predict the future. This number ranges from 300 to 850 and the higher the number, the better the credit. The three main credit agencies, Experian, Equifax and Transunion all use the FICO model and report their scores to a VA lender when asked. The numbers will be similar to one another but rarely exactly the same. Because information can be reported differently and at different times to the credit agencies by creditors, the three digit numbers will be slightly off. For example, a VA lender might receive three scores of 734, 746, and 752. The lender will use the middle score and throw out the lowest and highest.
The VA doesn't set a minimum score but VA lenders do. Most VA lenders require a minimum 640 credit score but still others have a 620 rule. That means if your scores are low and the VA lender declines your loan because your score is 635, another VA lender could approve your VA loan request because the 635 score is above their 620 minimum.
Bankruptcies, Foreclosures and VA Loans
It's true that a bankruptcy or a foreclosure can stay on your credit report for seven years but that doesn't mean you have to wait that long in order to use your VA home loan benefit. In fact, in the instance of a foreclosure, you may qualify if more than two years have passed since the foreclosure date. 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 two years have passed since the discharge date and credit has been re-established. This is very important. A VA lender will have a difficult time approving a VA loan if there is 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 and is called "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 done every single day.
Grant Moon is an Army Reserve Captain and CEO of VA Loan Captain, Inc., a veteran-owned business that facilitates VA Home Loan Purchase and Refinances through a platform of lenders that offer competitive rates for veterans and servicemembers. He is also the author of the "Ultimate Guide to VA Loans" from a Veteran’s Perspective. For more information, visit www.valoancaptain.com. If you have home loan questions, you can send them to Capt. Moon at firstname.lastname@example.org.