Credit underwriting for VA loans has gradually changed over the years and today, VA lenders evaluate home loan applications in the same manner as other loan types and use a credit score. And while the VA doesn’t specifically establish a minimum VA credit score, VA lenders have and the most common minimum scores are between 620 and 640. But where does the score come from and how does the lender know which score to use?
Credit scores range from as low as 300 to as high as 850, the higher the score, the less likelihood of a loan default. Credit scores used by lenders are calculated with an algorithm developed by the Fair, Isaac Company, or FICO for short. The formula evaluates multiple characteristics of the borrower’s credit history including payment patterns, loan balances, credit limits and other factors.
There are three main credit repositories that creditors report their customer’s payment patterns to, a large database held by Experian, Equifax and TransUnion. Each repository typically has similar credit information on each borrower with just a few variances. When a lender requests credit scores, the lender receives one score from each bureau.
As the lender receives the score, the lender uses the middle score and ignores the highest and lowest number. On a few occasions, only two scores will be reported, typically due to a borrower new to the credit markets. With two scores, the lowest is used.
When a couple files jointly there will be six scores reported, three for each borrower. Which one will the VA use? For credit scoring purposes, the lender will compare the middle score for each borrower and use the lower score of the two.