VA loans offer veterans a flexible financing option. Many veterans worry about the minimum FICO requirements, though. After being away, they may or may not have a maximized credit score. Luckily, the VA is very flexible with credit scores.
The reality is, the VA does not have a minimum requirement. Just like they don’t have a minimum debt ratio requirement, they don’t focus on credit scores either. Lenders, on the other hand, may paint a different picture.
What are Lenders’ Minimum FICO Requirements?
Just like FHA and USDA loans, the VA doesn’t fund their loans. They guarantee them. This gives lenders a little more leeway when taking a risky application. They know if the borrower defaults on the loan, they will still get paid.
Does this mean lenders don’t have a minimum credit score requirement? Not really.
Many lenders still enlist their own requirements. The generally agreed upon credit score is 620. This seems to be the lowest a lender wants to go. Technically, a 620 score is considered “fair.” Most lenders would look at it as risky. With the VA guarantee, though, it becomes less risky.
Does this mean every lender will accept a score as low as 620? No. Some will require scores much higher. Some will even allow scores that are lower. It’s up to you to find the lender that will meet you in the middle.
What Does it Mean to Guarantee a Loan?
The VA is the entity that guarantees your loan. Basically, the promise the bank they will pay them back if you don’t make your payments. The VA guarantees 25% of the loan amount up to the allowed maximum. Right now, that allowed maximum is $424,100. This means a bank would receive up to $106,025 from the VA.
The VA sets their minimum standards for the loan in order to guarantee it. In those guidelines, they do not specify a minimum FICO score. They do, however, focus on one thing – disposable income. After you pay your monthly bills, you have money left over. At least that’s the hope. This is your disposable income. The VA has specific requirements on how much this must be.
The amount required varies by region. Here are a few examples:
- A family of 5 living in the Northeast needs $1,062 per month
- A family of 2 living in the South needs $738 per month
The amount varies based on the cost of living in your region. If you don’t meet these amounts, you can’t secure VA financing. The VA claims the focus on disposable income is what keeps VA default rates so low.
If you are a veteran, you should consider the VA loan option. It gives you a chance to secure a home loan with no money down. In addition to the minimum credit score requirements, the remaining guidelines are fairly flexible. They don’t have a maximum debt ratio requirement either. They simply require that veterans have stable income, enough disposable income, and have a VA approved property.