Qualifying for Government-Backed Mortgages

August 9, 2024

When applying for a government-backed home loan such as a VA or FHA mortgage, it's important to be aware of the credit problems that can complicate your loan or disqualify you from the mortgage.

It's good to understand what credit problems can hurt your loan approval chances while you're still in the planning and saving stages of the house-hunting journey.

Common Credit Problems

Some common credit problems that may disqualify you for an FHA or VA-backed mortgage include an undischarged bankruptcy, a current or past foreclosure, and home loan delinquency or being delinquent on federal debts can hurt your chances at loan approval.

If you have delinquent debt in the past and are currently in a repayment plan, be sure to include details of that plan when applying for a mortgage or following up on your application.

The Consumer Financial Protection Bureau (CFPB) is a valuable resource for learning more about credit issues and mortgages.

The CFPB provides helpful resources and guidelines for consumers navigating the mortgage application process. The CFPB advises potential borrowers to regularly study their credit reports to address errors or discrepancies. Future borrowers should also work to lower their debts and credit card balances.

Prospective homebuyers should be proactive in addressing credit problems that could affect their eligibility for a VA or FHA mortgage. Taking the CFPB-recommended steps to improve your credit, such as making timely payments, reducing outstanding debts, and avoiding new credit applications, will help you improve your credit reports over time.

You can learn more about home loans and consumer protections at the CFPB official page for mortgages.

VA Mortgage Credit Requirements

• There is no VA-provided minimum credit score requirement, but most lenders look for a credit score of at least 620.
• If you have qualifying military service, you can apply for a VA mortgage after obtaining a Certificate of Eligibility from VA.gov.
• You can apply for a VA mortgage with a co-borrower, but all parties obligated on the VA loan must be able to credit qualify for the loan. 
• One applicant's credit shortcomings are not offset by another applicant's credit strengths.
• Borrowers can purchase primary residences with a VA loan but not investment property.
• Qualifying for a VA mortgage means not being constrained under a current bankruptcy, having minimum qualifying military service, and meeting the lender's standards for income, employment, and FICO score minimums.
• There are no need-based requirements for VA mortgages. No income caps, household income restrictions, or other need-based criteria for loan approval.

FHA Mortgage Credit Requirements

• Generally, a minimum credit score of 500 to 580 is required, but some lenders may not consider FICO scores below the 600 range or higher.
• Borrowers should have 24 months in the job market at a minimum.
• Applicants must submit two years of tax filings and submit current income.
• Homes purchases with an FHA loan must be owner-occupied in a reasonable period after closing day.
• Applicants should have no late or missed payments in the 12 months leading up to the application.
• Consider seeking pre-purchase housing counseling to understand the requirements and improve your credit standing
• Like VA mortgages, there are no need-based requirements for FHA home loans. That means no income caps, household income restrictions, or similar need-based guidelines.

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