Nothing is quite as exciting as buying a home and financing it with the VA Home Loan Program. What’s not exciting is finding out you don’t qualify for a VA Home Loan because your credit score is too low. It’s actually quite disappointing, luckily there are steps you can take to raise your credit score so you can qualify. VA Home Loans are much more lenient when it comes to credit scores than other loan programs, but there are still minimum standards that the VA requires. Lenders will use your credit score to determine whether or not you would default on the loan based on your credit worthiness. The higher your credit score the easier it will be for you to qualify, and while the VA doesn’t have a credit score requirement, most lenders do have a minimum standard of 620.
How Credit Scores Work
Your credit score is a reflection of your past credit patterns, most importantly the last two years. The older the credit the less it matters. Lenders usually only look at the past couple years from the three main credit bureaus, Equifax, TransUnion, and Experian. All of these bureaus use the FICO method to produce your credit score, while they may be similar they will most likely never be the same score. Lenders will usually ignore the highest and lowest of the 3 scores and use the middle score for evaluation.
These are the five categories that will most commonly compromise a score;
• Payment History
• Account Balance
• Length of Credit
• Type of Credit
• Hard Inquiries
Each one of these categories has its own impact on the grand total of the score. Your payment history and account balance makes up two-thirds of your overall score, meaning those are the most important. The length of your credit score tells lenders how long you have been using your credit. The type of credit refers to whether it be various kinds of loans, credit cards, mortgages, etc. and inquires show everything you have applied for that requested your credit score, some inquiries are considered soft and others are considered hard. A hard inquiry has a much bigger effect on your credit score than a soft inquiry.
Fixing Your Credit
The first step you should take in fixing your credit score would be to go through your credit history and address any incorrect information, you can file a dispute through any of the 3 major credit bureaus. If there’s no misinformation your next step would be to look over your payment history and account balances. Usually any payment made missed by 30 days will report to the credit bureaus, same for 60 and 90 day late payments. You should catch up on all your late payments and keep them current for the next 6 to 8 months and you’ll see an improvement in your score. It can feel like a long process but over one years’ time your credit score will improve. This is the starting point for those who want to improve their scores.
Justin McHood is America's Mortgage Commentator and has been providing expert mortgage analysis for over 10 years.