FAQ Credit Score Refinance

What Does My Credit Score Have to be?

 

Congratulations, you’ve officially opened a can of worms. If you’ve asked this question before, you probably realize that you’re about to hear something different than you heard when you asked someone else. Every lender has different requirements, and even different ways of handling credit scores, each tailored to fit what that lender feels works best for their borrowers and their business model. The Department of Veteran’s Affairs sets no requirements on a VA-eligible borrower’s credit score. If the VA-approved lender is willing to finance the loan, then the VA is willing to guarantee it. The VA does its best to not interfere more than it thinks is necessary in the mortgage process, and not dictating a credit score is one way that they ease the regulatory burden on lenders and make it so they are never the “bad guy” if a veteran does not get approved for the loan. Brilliant, I’d say.

 

So, on to what really matters: credit score minimums set by lenders. This is where you’ll hear a different answer every time, because each lender has their own requirements. Most VA lenders have a set number that they will not approve anything below, and anything close to the minimum may be subject to extra scrutiny. In the case of many lenders, this minimum is 620. If that number makes no sense to you, here’s a basic scale:Minimum Credit Needed for VA Loan

  • 580 or lower (Poor Credit)
  • 580-620 (OK Credit)
  • 620-660 (Good Credit)
  • 680-720 (Great Credit)
  • 720 plus (Excellent Credit).

 

 

 

In other words, 620 is right on the line between poor credit and OK credit. The main problem with having a hard minimum set like 620, is that good, creditworthy individuals may have had something bad happen to them that has set their credit score back. A common example of this is when an injury or medical emergency happens and the medical bills are negatively affecting a credit score. Heck, just the expenses of having a baby can have a drastic effect. This is one way that LowVARates is different from many other lenders – we have no set minimum acceptable credit score. Obviously, a score in the low 600s will be under more scrutiny than a score approaching 800, but no applicant is ever denied based on nothing but his or her credit score. We have this approach because we know that bad things happen to good people, and we know that behind every number is a lifetime of history, and a single snapshot never tells the whole story. So even though a 620 minimum is still actually quite borrower-friendly compared to other loan programs, we do not use a set minimum or what is considered “industry standard”.

 

If your credit is poor, be prepared for a higher interest rate or closing costs, though. While this does not always happen (sometimes we are able to secure the same interest rate and fees as for someone with great credit), it can be a way to mitigate the risk of making the loan. Some potential borrowers are actually a bit turned off by the fact that we don’t necessarily adhere to the accepted industry standard. Like as not, this has to do with the many scams out there that say things like “we offer credit amnesty” and “get approved even with bad credit”, but the fact is that we at Low VA Rates believe we are working with people, not numbers, and if we can do more people more good by looking beyond a number to their actual behavior and commitment, then that is what we will do. No one’s asking you to believe us, but our customer satisfaction says it all.

 

We mentioned above that even the 620 minimum is quite borrower-friendly compared to other loan programs. While FHA loans usually carry the same 620 minimum, USDA loans usually require at least a 660, while conventional loans usually look for something in the 740 range. Anything under 740 is usually subject to additional scrutiny and subsequent fees, if it is approved at all. So even if you choose a different VA-approved lender than Low VA Rates, a VA loan is far easier to qualify for than a conventional loan.

 

Loans Involving Temporary Interest Rate Buydowns

Deciphering the VA Lender’s Handbook Chapter 7 Part 18

 

While something you may have not heard about before, something you’ll likely want to know about and keep an eye out for, is the possibility that home builders, sellers, or lenders may sometimes establish and fund a special escrow account for the purpose of reducing a borrower’s loan payments during the initial years of the mortgage. This is often used as a marketing tool to attract more buyers. In some cases, a borrower may also fund an escrow on their own as a financial management tool. The VA has no problem with these types of situations, as long as the borrower is eligible for the VA loan being offered and the lender is VA-approved. Additionally, such an interest rate buydown can be used with any type of loan except for a GPM.

 

There are some special rules that govern the way the escrow account works in these cases. First, whichever party is establishing the escrow (builder, seller, lender, borrower), the escrow must be out of reach of their creditors. In other words, it must be something protected from seizure should a creditor have legal cause to seek payment of a debt. The only exception to this rule is if the holder of the loan is the Federal National Mortgage Association. If FNMA is the holder, they can take direct custody of the funds. The escrow agent (not the party that established and funded the escrow, but the party that has the ability to access the funds), is required to make payments out of the escrow directly to the lender or servicer of the loan. The funds from the escrow can only be used for payments currently due on the note, and cannot be used for past due amounts. If the loan is foreclosed, the funds are credited against the veteran’s indebtedness.

 

Temporary Interest Rates Obviously, such an arrangement affects the borrower’s first year or several years of making payments on the loan. This begs the question of which monthly payment amount should be used to underwrite the loan and determine sufficient income. To clarify, if the payments the first year are $900/month and $1,100/month after the buydown runs out, should the lender use the $900 figure or the $1,100 figure in determining eligibility? For the most part, the lender will use the $1,100 figure. However, the VA does have provisions that allow the lender to use the $900 figure in certain cases. The main factor is whether the borrower’s income is likely to increase enough over the next few years to keep pace with the increase in payments as the buydown runs out. Generally, the lender is expected to use information such as an increase in wage guaranteed by a labor contract (teachers, auto workers, etc.) and other factors that strongly indicate that the borrower’s income will increase.

 

The buydown must run for at least 1 year, and the increases in payments (or interest rates) must be accomplished in equal amounts each year as the buydown runs out. If the borrower’s income cannot reasonably be expected to increase to keep up with the payments, then the loan must be underwritten using the full monthly payment that will be required after the buydown runs out. This ensures that the borrower will be able to keep pace with the payments even if their employment and income do not improve over the next few years. However, even in this case, the buydown arrangement can be considered a compensating factor if the borrower’s income or credit is not quite sufficient for loan approval, and may make the difference between getting approved for the loan and not, though usually more than one compensating factor is required to make that happen.
As a borrower, you should receive a clear, written explanation of the buydown agreement from the lender which you will need to sign. If there is anything about the buydown agreement that you do not understand, make sure to check it with your lender before moving forward. Buydowns are not very common and usually go pretty quickly when they crop up, but if you find a builder, seller, or lender offering a buydown, you should at least check it out to see how much benefit you will get out of it.

How to Improve Your Credit Score

How to improve your Credit Score

 

One of the best pieces of advice for preparing to get a VA loan is to start your preparations at least a year, and preferably two, before you actually apply for the loan. Why is this? Primarily because of what it takes to get your credit report in proper order; delinquent debts can stay on your credit history for months after they’ve been paid off, and sometimes it can take months to pay off your existing debt.

Your credit score is an algorithm-based evaluation on your overall credit-worthiness at the time the score is requested, while your credit report is a listing of all the factors that went into calculating your credit score. Check out this guide to help you get on task and own your credit before it owns you.

 

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