Follow These 6 Steps to Restore Your Credit for a VA Home Loan
The VA home loan program offers one of the most seamless mortgage application processes available. For qualified military and veteran applicants, the income requirements are flexible and you can become a homeowner with zero down payment.
The only real hurdle for some borrowers is credit score.
Below we’ll break down strategies for getting your credit score up.
Credit Score Minimums for VA Loans
Because these loans are backed by the Department of Veterans Affairs, lenders are comfortable with assuming a little more risk on VA loans than with other types of loans. This means the credit score requirements are a little more lenient than with some other loan types. The VA doesn’t mandate a minimum credit score requirement but lenders impose their own minimums. You can expect to need a credit score of at least 620-640. By comparison, conventional loans usually require a credit score of 660 or more.
Still, if you’ve had some credit missteps in the past, it’s quite possible that a credit score in the low 600s or below can hold you back from homeownership. If you’re in that position, you may be able to give your credit score enough of a boost to get it where it needs to be — maybe even in a matter of months.
FICO Score Breakdown
FICO scores range from 300 to 850, and the higher the score, the less risk you pose to a lender. That’s because credit scores are based on an algorithm that factors in different aspects of your credit behavior and history. According to FICO, these factors include:
- Payment History (35%)
- Account Balances (30%)
- Length of Credit (15%)
- Types of Credit (10%)
- Inquiries (10%)
The two biggest items – paying your bills on time and keeping your account balances low – also happen to be areas that are in your control. In other words, with some smart maneuvering, you can positively impact your credit score.
Step 1. Pull your credit report and request your FICO score.
Oftentimes, people don’t even think about their credit status until they are ready to apply for a mortgage loan. But actually, you should be looking at where you stand at least once per year.
You’re entitled to one free credit report via annualcreditreport.com, from each of the three credit bureaus (Experian, Equifax, and TransUnion). Reports will show all of your accounts, and if they’re in good standing or not. What they won’t reveal is a score. For that, you’ll have to take the next step and pay a small fee, usually under $20, to see your scores. You’ll actually wind up with 3 scores, one from each bureau, which should be in the same ballpark. Slight differences occur because not every lender reports to all three bureaus.
Step 2: Look for errors and fix them.
It might surprise you to learn that 1 in 20 people said they found mistakes on their credit reports that were significant enough to affect their credit standing with lenders, according to a 2013 FTC study. If you notice any negative information on your credit history report that is incorrect – such as a creditor saying you were late with monthly payment when you weren’t – disputing and correcting the mistake can help your credit score jump.
Step 3: Review those balances.
In addition to consistently paying all of your bills on time, if you have high balances on credit cards, that could be hurting your score. Lowering your credit utilization ratio – the amount of debt you owe as compared to the amount of available credit you have – is a surefire way to see some progress on your credit score.
For example, if you have a $10,000 credit limit and owe $8,500, your utilization is 85 percent. Credit scores look more favorably on consumers that keep that percentage as close to zero as possible, but preferably under 30 percent.
Step 4: Wipe out your debt strategically.
If you have access to some savings account money or are expecting a tax return or bonus, that’s a great way to make a lump sum repayment on one of your credit accounts.
Financial experts recommend tackling the account with the highest interest rate first (since it’s costing you the most) while making minimum payments on your other accounts. Others say focusing on smaller balance accounts that can be paid off completely could give you some motivation to continue. Either method will work, as long as you stick with it, but for the purposes of getting a higher credit score, consider attacking the account with the highest credit utilization.
Step 5: Avoid opening new lines of credit.
While it’s tempting to upgrade your car or put furniture purchases for your future house on credit, applying for and adding new accounts to your credit file can result in a lower credit score. Try to put off new applications and inquiries until after your mortgage is closed.
And that means all the way done. Even if you open a charge account on the day of loan funding, your lender can still discover it and halt your funding.
Step 6: Get some guidance.
If you need help budgeting or financial advice to get you through your debt repayment, try speaking with a credit counselor. Locate legitimate ones who can give you free or low-cost help through the National Foundation for Credit Counseling (NFCC).
Improving Your Credit Score To Qualify for a VA Loan
If you correct credit history errors, make your monthly payments on-time, lower your account balances, and avoid opening new accounts, you could start to see incremental improvements in a few months.
Homebuyers who qualify for VA loans have access to the one of the best loan products on the market. If your score is less than 100 points below the VA home loan minimum then homeownership is just within your reach. If you have more serious credit problems such as a bankruptcy claim in the recent past then climbing back up could take a few years.
The important thing is to get started on a credit score improvement plan and keep tabs on your progress. Before you know it, you’ll be ready to start shopping for your VA home loan.