Your credit profile plays a key role in your homebuying journey. But when it comes to VA loans, credit scores don't wield quite the same influence as they do with conventional financing. And that's good news for many veterans and military families.
To be sure, prospective VA buyers will likely need to meet a lender's credit score benchmark. But that cutoff tends to be lower than what you'll need for a conventional loan. Plus, credit scores generally have less bearing on VA loan interest rates compared to their conventional counterparts. That means VA buyers don't necessarily need top-tier credit to land a competitive interest rate.
Let's take a closer look at credit scores and VA loans.
VETERAN HOMEBUYER CENTRAL: Find out what your service can do for you.
Credit Score Requirements
The VA doesn't require any certain credit score to utilize this benefit program. But the VA also doesn't make home loans. Instead, the VA essentially insures loans made by private mortgage lenders. Those lenders will usually require borrowers to meet a certain credit score minimum.
Benchmarks can vary by lender and other factors, but it's often a minimum 620 score for VA home loans. That bar might be a 660 or higher for a conventional loan.
Beyond that, would-be buyers with scratched or dented credit may still be able to land a VA loan. The required waiting periods following a bankruptcy, foreclosure or short sale tend to be shorter for VA borrowers than for conventional mortgage seekers.
Keep in mind that mortgage lenders will likely see a different credit score than what consumers find either by paying to see their scores or from monitoring tools and applications. Lenders use scores that are specially weighted for mortgage lending, so what you think is a 725 might actually be a 650 to some lenders.
Credit Scores & Interest Rates
In the world of mortgages and homebuying, higher credit scores tend to broadly translate to better interest rates and loan terms. Buyers with sterling credit are often seen to pose less risk, and interest rates are one way lenders compete for well-qualified borrowers.
But the government backing behind VA loans already helps to mitigate some risk for lenders. Historically, that's translated into lower average interest rates for VA loans compared to conventional mortgages. In fact, VA loans have had a lower average interest rate than conventional loans for nearly all of the last two years, according to mortgage software firm Ellie Mae.
For conventional financing, buyers might need excellent credit – a 740 score or higher in some cases – to compete for the best rates out there. But qualified VA buyers may be able to access competitive rates without needing exceptional credit. That's a significant benefit for veterans and military buyers.
Interest Rates & APR
At the day's end, every buyer's situation is different. That's especially true when it comes to credit scores and interest rates. Mortgage rates can change multiple times in a single day, and different lenders may quote you very different rates.
When doing comparison shopping, be sure to look at the annual percentage rate, or APR, along with the interest rate on the mortgage. The APR takes into account other costs and fees related to the loan and could be a better gauge of its true cost.
Your interest rate will ultimately hinge on set of hyper-specific factors. But competitive rates, even for military buyers without solid credit, remain one of the single-biggest benefits of VA home loans.