Understanding Your Credit Score for a VA Loan

Are you thinking about getting a VA loan? If so, it's a good idea to know what the credit requirements are. We have put together some of the top questions people ask about their credit score when trying to get a mortgage.

What credit score do I need for a VA loan?

The U.S. Department of Veteran's Affairs (VA) doesn’t have a minimum credit score requirement. Instead, they have their VA-approved lenders, like PenFed, review the borrower's entire loan profile — that includes creditworthiness. Lenders offering VA loans to borrowers typically have a credit score requirement.

What is a good credit score?

Credit scores range from 300 to 850. Here is a typical breakdown of their ranking:

If, after looking at this table, you think your credit may need work, we'll give you some steps to improve it. As your credit score gets better, you might find your quoted interest rate improves as well. The higher your score, the lower your interest rate could be. That's because the lender considers you a better credit risk.

Can I get a VA loan with poor credit?

The answer is most likely, yes. If your credit isn't the best, you may have to improve it first. The good news is that it might only take a matter of months. That's why if you're planning to buy a home and get a mortgage, it's a smart idea to start the process early. It’s never too early to contact PenFed's mortgage professionals. They are happy to discuss your situation and goals with you, so you know how to proceed.

Does a better credit score mean better rates?

Typically, with all things being equal, the answer is yes. A stronger credit report should deliver a better interest rate, but several factors can alter your interest rate. For example:

• Property sales price
• Down payment
• Loan amount
• Loan term — a 15-year loan has a lower rate than a 30 -year term
• Number of units — one or two (must be a primary residence)
• Location of the home — the rate can vary slightly depending on the state

It’s a good rule of thumb that the better your credit score, the higher the chance you will get a favorable interest rate.

Is a VA loan better if I have bad credit?

If you’re looking for the lowest rates and down-payment requirements, the answer is yes. Because the VA guarantees a portion of the loan, the lender can give you better terms. Although you may need to work on your credit before qualifying, it’s worth it. For veterans — a VA loan is usually the first choice.  

How can I improve my credit score?

There are many useful financial resources online. These can provide detailed information on improving your credit including, Consumer.gov. Let's focus on some of the basics.

1. Try to pay down your debts as much as possible. Reducing the amount of money you owe is the best thing you can do to improve your credit.
2. Don’t close any accounts. That is an important point because the age of your credit accounts impacts your score. The longer you’ve had your accounts, the better.
3. Continue to make all payments on time.  Don't be late if at all possible — especially on a mortgage payment.
4. Keep your debt-to-available-credit ratio low. If your credit card has a $5,000 limit and you have $4,800 in debt, that ratio is too high. Although it’s not always possible, try to utilize 30% or less of your available credit.
5. Check for errors in your report - it's not uncommon for credit agencies to make mistakes. If there is an error, fixing it can have an almost immediate positive effect on your credit. It is smart to check your credit report each year. That way, you can see if there’s anything you need to fix.
6. Don't take on new debt. As you're getting closer to buying your home, it's not advisable to take on any more debt. That’s because it can affect your loan approval, which is especially true of large purchases. Buying that shiny new truck could put a roadblock between you and qualifying for that mortgage.

How long does it take to improve my credit score?

It depends. For example, if there are errors on your report or items you should contest or challenge, do so. The positive effects could occur quickly. If you have a bankruptcy — it needs to be discharged for two years. If you have past or current collections, you’ll need to provide more explanation to the lender. In addition, you’ll need to re-establish good credit over 12 months.

The good news is that even with a bankruptcy, you may still be able to get a VA loan.

How important is your credit score when getting a VA Loan?

With any loan, including a VA mortgage, your credit score definitely comes into play. It is a significant factor in determining your strength as a borrower and your ability to repay the loan. If you have a history of foreclosure, collections, or late pays — you will need to re-establish your credit. It may be challenging for you to get any mortgage. With persistence, it can happen. Your interest will likely be higher, but you can always refinance later when you’ve improved your score even more.

Remember, stay on top of your credit, pay on time, and don’t over-leverage yourself with too much debt. Most importantly — start planning on your home purchase early. A VA loan can make the dream of homeownership come true for veterans and their families.