For every veteran, buying a house with the VA home loan benefit is quite an exciting moment. Unfortunately, for a lot of them, the moment is ruined when they credit score is not at par to qualify for a mortgage. Not many veterans are aware of the credit score requirements for VA loans. Even though VA home loans are quite flexible when it comes to credit, there are still things that can undermine your chances of getting the loan.
Here are a few pointers that you need to keep in mind when applying for a VA home loan:
Credit Worthiness:
First and the foremost, the VA does not have a credit score requirement but it is up to the lender to determine your credit worthiness. In doing so, lenders usually use the credit score as a measure to evaluate the likelihood of defaulting on the loan. Scores usually range from 300 to as high as 850. The higher your score is, the more chances you have of scoring a loan. Note that most VA lenders keep the minimum at 620 or 640.
How Do Credit Scores Work?
It is important to understand how credit scores work in you want to improve yours. First off, credit scores are a reflection of your past credit patterns. Emphasis is mostly placed on the most recent two year period. This way, the older the credit is, the less important it becomes. Now, the calculation is done by applying an algorithm developed by FAIR, Isaac Corporation (FICO). All businesses report credit patterns of their customers to one or all three of the following credit bureaus: Equifax, TransUnion and Experian. These bureaus utilize the FICO method to produce a three digit credit score. Note that scores of each bureau is different but quite similar. The difference is because each bureau has different reporting requirements. When you apply for a VA loan, these credit scores are up.
Lenders will use the middle score, not the highest and not the lowest ones. Your score is based on the following patterns:
– Payment History (35%)
– Length of Credit (15%)
– Account Balances (30%)
– Types of Credit (10%)
– Inquiries (10%)
Note that each category has its own effect on the total score. As you can see, Payment History and Account Balances are the two most import ones.
How to Fix Your Credit Score?
If your credit score falls below 620, chances are you won?t score the loan. But, is that where the world ends or can you improve it? Well, the good part is that you can certainly fix the score to get the loan. Firstly, you need to make sure that all the information with the bureaus is correct and there is nothing negative reported that is hurting your score. You can ask your current borrowers to provide documents to the VA lender to work directly the credit bureau to correct the score. This way, if there is a mistake, it will be rectified.
Another quick way to fix your credit score is to stop making late payments. Note that this single category accounts for more than one-third of the credit score. The second category to concentrate on is the account balances since it can hurt your score the most.
Focus on these two categories for six to eight months and there will be a great improvement in your credit score.