As a sign of the times, mortgage investors across the country have made it a requirement that a borrower have a 620 FICO score or higher to qualify for a VA loan. Now, this is not a change implemented by the VA Department – this is something that mortgage investors (those who actually purchase note on the secondary market) have now enforced due to the elevated default risk associated for borrowers with sub-620 FICO scores.
Previously, no minimum FICO score requirements existed – as long as the broker/lender received an approval through either Fannie Mae’s or Freddie Mac’s “Automated Underwriting System” (AUS), the Veteran would be approved. Even if the broker/lender did not get an approval through an AUS, there was an option to do a manual underwrite in which a VA approved underwriter could approve a loan based on compensating factors and explanations of previous derogatory credit. The compensating factors would have to validate that the Veteran is worthy of credit approval – and can meet the expected housing obligations. Fast forward to March 2009 and manual underwriting is no longer allowed. The Veteran must get an approval from an AUS in order to qualify for a VA Loan.
This should not be all “doom and gloom” for those VA eligible. A 620 minimum FICO score has been a longstanding requirement for conventional loans. Keep in mind, VA loans are not subject to Loan Level Price Adjustments (LLPA’s) – unlike their conventional loan counterpart. Since conventional loans (non-government loans sold to Fannie Mae & Freddie Mac) implemented LLPA’s in late 2007, loan pricing varied based on credit score and equity in the home (loan-to-value ratios or LTV). So, if a conventional loan borrower with a 620 FICO and less than a 30% down payment wanted to borrow $400,000 – he/she could do so, but would be subject to an additional pricing hit of 3% of the loan amount. This translates to an additional $12,000K (3% of $400,000) at closing to obtain the loan. Since VA loans are not subject to LLPA’s, a Veteran with a 620 FICO score does not have to pay this additional cost.
For those of you who would like to qualify for a VA loan but fall short of the 620 FICO requirement – there are credit analysis tools that can help forecast your FICO score if certain actions are taken (like paying down debt or removing an incorrect late on a credit card). Feel free to contact us to learn more about how to access these tools. It may help provide a blueprint of what you may need to do to qualify in this constantly changing mortgage environment.