Follow These 6 Steps to Restore Your Credit for a VA Home Loan

Dawn Papandrea
Military VA Loan contributor

The VA Home Loan program offers one of the most seamless mortgage application processes there is. For qualified military and veteran applicants, the income requirements are lenient, plus you can become a homeowner with zero down payment. The only real sticking point for some borrowers is credit score.

Lenders are comfortable with assuming a little more risk since a good portion of VA loans are backed by the VA, but still, a respectable credit score is necessary in order to be approved. By respectable, it usually means a minimum FICO score or 620-640 or so, but that will vary by lender. In comparison, conventional home loans usually expect scores north of 660.

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 home ownership. If you’re in that position, however, in a matter of months, you may be able to give your credit score enough of a boost to get it where it needs to be.

Take a look at the credit score improvement cheat sheet below for strategies that will help your score soar.

Check your VA loan eligibility here.

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. Ready to get started?

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. But actually, you should be looking at where you stand at least once per year.

You’re entitled to one free credit report via, 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 report that is incorrect – such as a creditor saying you were late with 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 debt 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 payment 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 credit score, consider attacking the account with the highest 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 temporary drop in score. Try to put off new applications and inquiries until after your mortgage goes through.

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 payoff, 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).

If you correct errors, stick to on-time payments, lower your balances, and steer clear of opening new accounts, you could start to see incremental improvements in a few months.

If your score is less than 100 points shy of the VA home loan minimum, home ownership is just within your reach. If you have more serious credit problems such as having filed a bankruptcy claim in the recent past, however, climbing back up could take as long as 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.

Click here to see if you qualify for a VA home loan.