If you looking forward to buy a home with your VA home loan, you might want to check with the borrowers first to see if your credit score is at par or not to qualify for the mortgage. While it is an exciting moment for many to finally realize the dream of having your own home, a low credit score may just crush it.
It is true that compared to other loan types, VA loans are flexible and offer ease yet there are standards that are required to be met. At the time of the application, the VA lender is responsible for checking the credit history of the personnel prior to processing the loan.
It should be noted here that unlike with other loans, here the VA will not set a standard credit score requirement. Instead, the condition is that the lender needs to be creditworthiness. Again, there are set parameters yet most VA lenders keep the credit score minimum at 620 or 640. Credit scores could range between 300 and 850. The higher your credit score is, the lesser are the chances of you defaulting.
Understanding Credit Scores:
It is an absolute must for everyone to understand how credit scores work in order to check their own credit score with ease. Credit scores are a reflection of your past credit payments or loan reimbursements. The emphasis is usually kept on the most recent two year period. It should be noted here that the older the credit is, the less importantly it will be in the calculation.
The algorithm used to determine credit scores was developed by Fair, Isaac Corporation (FICO). Businesses are to report the patterns of payments of their customers to Equifax, Experian and TransUnion. They can either report to all three or just one it?s up to them. These departments then use the FICO method to calculate the three digit score. Note that the scores from all three bureaus are rarely the same; however they are usually close.
For VA loans, the veteran?s credit history is analyzed and the credit score is usually somewhere between 741, 738 and 745. The lender will neither use the top score nor the lowest score. Instead, they will use the middle score as an average of all three.
Following are five categories that can have an impact on your credit score, along with their contributing share:
- Payment History ? 35%
- Account Balances ? 30%
- Length of Credit ? 15%
- Types of Credit ? 10%
- Inquiries ? 10%
While each category has an individual effect on the credit score, the two most dominant ones are Payment History and Account Balances. These two categories make 2/3 of the total credit score.
Length of Score category determines for how long the person has used credit in the past. On the other hand, Types of Credit checks for the different loan lenders the applicant has taken loans from, such as mortgage lenders and finance companies. Similarly, Inquiries looks at the total number of new credit applications the applicant has applied for. This is the reason why it is advised not to apply for a loan and a mortgage at the same time, as it will hurt your overall score and the lender will require documentation of the inquiry. The lender will do this in order to check if any additional credit has been provided.
The Solution to Fixing Your Credit Score:
Let?s assume the borrower stands with a middle credit score of 550, how can s/he improve it?
Correct All Errors in Your File:
The first and the foremost step you need to take is to check all the information in the file is accurate. Any incorrect information that is negatively hurting your credit score should be spotted and rectified. You will have to provide the required documents to the lender so that they can work with either one or all of the bureaus to fix the errors and calculate the scores again. In case there?s an error in your file, this process should rectify and improve your score.
Focus on Payment History and Account Balances:
If you have gone through the files thoroughly and haven?t found any discrepancies, the next step is to check the payment history and account balances.
What are Account Balances?
Account balances basically compare your current outstanding loan amount with your current available credit. This means that if your current credit balance is $5,000 with a credit card limit of $10,000, then you are using around 50% of the total credit available to you. Note that while this seems favorable, it?s not. This debt will negatively affect your credit score. It will keep growing if you maintain the same credit score even though you are making payments on time but taking new loans. The best way to fix this is to pay back enough loan amount to reduce your account balance to a minimum of 30% available credit.
What is Payment History?
Payment history is a sum of all the late payments made by you to your lenders. Any payment that you made after the due date of 30 days has been reported to the bureaus. Similarly, when loans are 60 days or 90 days late, the bureaus are notified again. The best way to improve your credit score is stop making late payments. This category is important as it accounts for 1/3 of your total credit score. Therefore, improvements in this category will have an overall positive impact on your credit score.
What to Do?
Concentrate on improving the score of these categories for the next 6 or 12 months. If these scores improve, the overall credit score will drastically improve. While this may seem long and endless, it actually is a quick fix. Within a year you will see drastic changes in your credit score.