VA and FHA credit scores 620 post COVID

VA & FHA Credit Requirements Eased 2020

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VA & FHA credit score requirements lowered to 620. This comes after the temporary COVID related credit score requirement of 640 for both VA and FHA purchases.

FHA & VA Credit Score Needed Lowered to 620

Shortly after COVID rooted in the US, FHA & VA home loan credit score requirements increased. For both loan VA & FHA loans, borrowers suddenly needed a 640 credit score or better to be considered eligible. The credit scores for cash out loans went even higher to 660.

Effective October 22nd, 2020 – 620 is the minimum credit score needed for both VA & FHA. While not a full return to previous score requirements, the 20 point drop is great! It opens both FHA & VA mortgage options up to a considerable amount of potential homeowners. Cash out score requirements remain at 660 for both FHA & VA. Special requirements for purchase loans for scores with 620-639 exist.

Lower Score Borrowers Need FHA & VA

While Conventional loan credit requirements were steady post COVID, FHA and VA’s hike hurt lower credit score borrowers. This was especially true for lower score borrowers looking to put between 0% and 5% down.

First, FHA & VA do have credit score adjustments tied into interest rate. However, because both are government insured loans their “par” rate typically starts lower than a Conventional loan. Starting lower helps keep the ultimate and final rate lower after adjustments.

In addition, VA & FHA’s credit score adjustments to interest rate are usually less severe than those on Conventional mortgages.

Lastly, FHA’s mortgage insurance & VA’s funding fee rates do not factor in credit score. In other words, borrowers pay the same amount for each regardless of credit score. However, Conventional financing mortgage insurance premiums increase materially as credit scores decrease.

620 Credit Score for VA & FHA

To be clear, FHA & VA never changed credit score requirements themselves. But then again, FHA & VA do not lend anyone mortgage money. Instead, mortgage lenders lend money based on core guidelines FHA & VA create. As a result, lenders made the change to the credit score needed for FHA & VA shortly after COVID swelled. They did so to offset the risk COVID posed to the market.

This credit score toggling by lenders is known as an “overlay”. Think of an overlay like being a parent. Imagine you have a wild teenage child who can’t steer a bicycle let drive alone a car. Assume for a moment your state law allows a 16 year old to become a licensed driver. On the other hand, you as the parent set the driving age at 18 before handing “wild child” your keys.

This is exactly how it works in mortgage lending regarding overlays. The law stating a child must be 16 to drive is analogous to FHA & VA setting credit score requirements respectively. However, the lender is analogous to the parent. Since the parent thinks 16 is too risky for their spunky teenager they set an “overlay” to the State’s rule. No driving until Chucky is 18.

Additionally, overlays vary from lender to lender. However, the most common overlay regarding FHA & VA credit scores was an increase up to 640. Thankfully, and effective immediately the minimum credit score needed for FHA & VA is down to 620.

By Jeremy House

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