VA Loans with Under 620 Credit Scores

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Mortgage loans can be approved and funded in as little as 10 business days. While that’s not the standard processing time, most VA loans are approved and closed within 30 days, it’s possible due to the advances of technology. Several years ago, getting a VA home loan approved could take up to two months because the VA approved every single facet of the loan. Mortgage lenders would originate a VA loan application and the VA would take over. Today however, that’s not the case. Approved VA lenders have the authority to originate, process, underwrite and fund a VA home loan application without sending any part of the loan file to the VA, including credit reports.

VA loans are hands-down the best choice for those who qualify and are seeking a loan program that requires as little cash as possible to close but still has very competitive rates. VA loans require zero down and the borrower is restricted from paying certain closing costs.

Eligible borrowers for the VA home loan include veterans of the armed forces, active duty soldiers with at least 181 days of service, those with at least six years of service with the National Guard or Armed Forces Reserves and un-remarried surviving spouses of those who died while serving or as a result of a service-related injury. VA loans are also assumable. This means a buyer can assume an existing VA loan without having to apply for a brand new mortgage. Just like any other home loan however, the parties assuming the existing VA loan must still qualify based on income, employment and credit.

Reviewing a credit report used to be somewhat of a laborious process. The VA requires lenders to verify a responsible credit history. But that gives the lender quite a bit of latitude.  A lender would request and receive a credit report and then line by line review each credit account. If there were occasional late payments showing up, a late payment is one that is listed as more than 30 days past the due date, the underwriter would typically request a letter of explanation from the borrower and proceed with the loan approval. Multiple late payments however would indicate a less than stellar credit history and unless the loan application had other redeeming factors the loan application would probably be declined.

Fast forward to today and most every aspect of a loan approval is done via electronic means, even credit. Instead of a lender approving a credit history with a line by line approach, credit scores are used. Credit scores today use an algorithm developed by the FICO Company. This three-digit number will range from 300 to 850 with more favorable credit receiving a higher score. There are three main credit bureaus that use the FICO algorithm. Once a credit report and credit scores are requested, they arrive within moments in a digital file.

Credit scores take a look at five different aspects of a borrower’s credit history, they are:

Payment History

Account Balances

Types of Credit

Length of Credit History

Credit Inquiries

 

Each individual category contributes a certain percentage to the overall score. Instead of approving a credit report, lenders use the credit score when reviewing a VA loan application. Payment history accounts for the largest chunk of the score, contributing 35% to the three-digit score. The second most important relates to account balances. Credit scores improve when credit account balances are approximately one-third of available credit. If a credit card has a $3,000 credit line, scores gradually improve when the balance is $1,000 or somewhere near that amount.

When someone has used different types of credit responsibly, credit scores rise. Types of credit contributes 15% to the total score. For example, someone with an automobile loan, a credit card and a student loan will see scores improve. How long someone has had credit makes up 10% of the score and credit inquiries 10% as well. Someone with a longer credit history should have a better score than someone with a brand new credit account. Credit inquiries look at how many times someone has requested credit. Multiple requests for credit in the past two years or so could indicate the individual may be having financial problems and needs credit to pay bills. Once all of this is added up, a credit score is produced.

Because there are three credit bureaus there will be three scores. These scores will be very close to one another but because of different reporting times and the fact that not all merchants subscribe to all three, scores are rarely exactly the same. For example, scores might be 770, 764 and 766. Lenders then throw out both the highest and lowest score and use the middle score when underwriting a VA loan application. If a married couple applies for a VA home loan and both have their own individual scores, the lender uses the lowest middle score for qualifying.

It’s important to note here however that the VA does not itself require a minimum credit score. Lenders however, typically do. The most common minimum credit score for a VA loan is 620. But what happens when someone’s credit score is below 620, is it automatically turned down? Not necessarily.

Let’s say there is a couple buying a home and the lowest middle score is 600. If the lender has a minimum credit score requirement of 620, the application deserves more scrutiny. In this example, it’s possible to remove the non-veteran spouse from the loan application and see if the veteran’s income alone can qualify for the new loan. If the veteran’s credit score is 650 and the spouse at 600, then removing the spouse from the application could point toward an approval.

If this isn’t the instance, that the minimum score is 600, the lender can look at other positive factors within the file that could override a decision to turn down the loan. These additional factors are referred to as “compensating factors” and can be such aspects as the borrower being employed with the same employer for several years demonstrating job stability. Perhaps the borrower has access to bank and investment accounts that show a respectable balance. Maybe the score is at 600 because of an isolated incident that recently occurred. Recent late payments can harm a score more than one that happened a couple of years ago.

If a lender can make the determination the borrower will make timely mortgage payments well into the future based upon other positive aspects of the file and not rely solely on the credit score, a loan can be approved and still be eligible for sale in the secondary markets. The lender will simply write a note in the file explaining why an exception for the credit score was made.

It’s important to note here that these are general VA guidelines. Our internal guidelines compare both the qualifying credit score with the debt to income ratio. Our review of compensating factors allows for an approval with a score as low as 580 and a debt ratio of 43. This means that monthly credit obligations, including the mortgage payment should not exceed 43% of gross monthly income. If the score is greater than 620, we can process and approve a VA loan application with a debt ratio up to 56.9%.

The Author, Matt Herbolich, MBA, JD, LLM NMLS #1649154 is the Editor-In-Chief of Loan Consultants. He is a senior loan officer at USA Mortgage, a division of DAS Acquisition Company, LLC NMLS# 227262. Mr. Herbolich is also the Co Editor-In-Chief of The Gustan Cho Mortgage & Real Estate Resource Center at www.gustancho.com . He is licensed as a mortgage loan originator in numerous states throughout the United States. Contact Matt Herbolich for your Real Estate and Mortgage Questions. USA Mortgage is a direct lender with no lender overlays on Government and Conventional Loans. Mr. Herbolich can be reached 7 days a week at 888-900-1020 by phone, on his cell at 786-390-9499 by either phone or text, or by email mherbolich@usa-mortgage.com.

 

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