You applied for an FHA or VA loan, but your lender said your credit score is too low.

Here is the number one thing you need to know: The minimum credit score may be a lender overlay.

What are Lender Overlays?

Lender overlays are more stringent standards than investor guidelines set by Fannie Mae, FHA, and VA.

The most common lender overlay is minimum credit score.

Did you know that the true minimum credit score for FHA and VA loans is 500?

Most lenders will tell you that the minimum credit score is higher, often they say 580. But that is not true. It’s their minimum credit score.

Often lenders hide this fact because they hope you return to them when your credit score improves. Don’t wait.

Even with a credit score of 500, you can still get a terrific fixed rate.

“The true minimum credit score for FHA and VA loans is 500.”

The Real FHA and VA Guidelines (don’t let a lender tell you different)

FHA Purchase: The minimum credit score is 500. Your qualifying score is middle of your three scores from credit bureaus Equifax, Transunion, and Experian.

  • For credit scores between 500 – 579, the minimum down payment is 10%
  • For credit scores of 580 and above, the minimum down payment is 3.5%

FHA Cash-Out Refinances:

  • For credit scores of 500 and above, the max cash-out is 85% of the appraisal value

FHA Streamline Refinance:

  • There is no minimum credit score. You can streamline without even having a lender look at your scores

VA Down Payment: 

  • For credit scores of 500 and above, you can buy with 0% down

VA Cash-Out Refinances:

  • For credit scores 500 and above, you can take cash-out up to 100% of the appraised value

VA Interest Rate Reduction Refinance Loan (IRRRL):

  • There is no minimum credit score, lenders are not required to look at your scores.

7 Steps to SELFi

Don’t stop shopping just because one lender said your credit score was too low. It may be their overlay.

The Bottom Line

FHA and VA have set guidelines, however, lender overlays make it more stringent to qualify. Not all lenders have overlays. Make sure to shop around.

Do not miss the opportunity to take cash-out or buy your dream home just because one lender has an overlay.

Learn more about getting an FHA or VA loan with a low credit score here.

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