Your credit score determines more than your eligibility for a VA loan. It also affects the VA mortgage rate a lender gives you. Generally, the higher your credit score is, the lower the interest rate a VA lender will quote you and vice versa.
This is on a borrower-by-borrower basis though. There isn’t a specific interest rate assigned to each credit score. They don’t have a direct relationship, but they are definitely intertwined.
What VA Lenders Consider When Determining Your Interest Rate
VA lenders look at your loan application as a whole. They want to know what type of risk you pose to them. Are you likely to default on your loan or are you more likely to make your payments on time?
The more likely you are to default on your loan, the higher the interest rate a lender will charge you. That is a direct relationship. But there’s nothing saying that a borrower with say a 650 credit score gets one rate and a borrower with a 680 credit score gets another rate.
Lenders look at everything combined. For example, let’s say you have a credit score on the lower end, say 620, but you have a low debt ratio and an exceptional amount of disposable income. You also put money down on the home, which the VA doesn’t require as they provide 100% loans. You may get a lower interest rate than the next borrower.
Let’s say the next borrower has a higher credit score of 680, but he also has a high 43% total debt ratio and he just meets the disposable income guidelines for his family size and location. This borrower also isn’t putting any money down on the home. He may get a higher interest rate than the borrower above despite his higher credit score.
How Can You Lower Your Interest Rate?
If you want to get the lowest interest rate possible on your VA loan, you have to prove to the lender that you are not a high risk.
The first thing is to work on your credit score. It certainly can’t hurt. You want your credit score as high as it can get, even though the VA doesn’t have a minimum credit score requirement. Lenders often prefer a credit score of at least 620. Because 620 is on the lower end of the spectrum, though, you might expect to get a higher interest rate to make up for the risk. You should aim to get your credit score as high as possible.
Next, you’ll want to focus on your debt ratio and/or your disposable income. The VA chooses to focus on disposable income. They want to know that you have a specific amount of money available each month based on your family size and your location. You can also focus on your debt ratio, keeping your total debts, including the new housing payment at less than 43% of your gross monthly income.
The VA isn’t very credit score heavy. In other words, they don’t put a lot of emphasis on it. This doesn’t mean that they won’t look at your credit scores though. It will play a role in the interest rate they provide you, but you should put your focus on the big picture to make sure you present a good picture when trying to get your VA loan.