Despite the fact that VA loans have a much-relaxed underwriting process and qualification requirements compared to conventional loans, the lenders offering these government-backed loans still have a benchmark for credit requirement. Most VA lenders require a credit score of at least 620 – a figure that is usually difficult to achieve for veterans and serving members of defense forces, due to the transient nature of their job. As defense personnel need to shift base frequently, their family members also find it difficult to maintain a steady employment, which adds to the instability of their credit profile. As credit score is an important aspect of the VA loan monitoring process, here are four steps military home buyers can take to improve their credit score and utilize VA loan benefits in an optimal manner.
1. Pay Bills on Time
Credit history holds the highest worth in your credit score calculation–35 percent according to the FICO model. Therefore, no matter the type of loan, you must pay your bills on time to avoid penalty. Even a single late payment may negatively impact your credit score; however, the repair process often takes much more time than the damage. Again, the size of the loan and the duration of delay also matters a lot. A $600 auto loan payment due for five months, for example, would have a larger impact on your credit score than a $55 credit card fee due only for 90 days.
2. Establish Different Lines of Credit
The ‘types of credit’ section in your credit report holds 10 percent of your total credit score. Therefore, taking small auto loans, or using a credit card judiciously is a nice way to boost your credit score. It does not mean that you establish multiple new credit lines to make the ‘type of credits’ section better in your credit report. In fact, doing so may adversely affect your credit score, especially if your lender asks for a hard inquiry.
3. Regularly Monitor Your Credit Report
Neither it takes much time to check your credit score nor it costs anything. You can get one copy of your credit report from all the three credit bureaus for free at http://www.Annualcreditreport.com. Remember, regularly monitoring your credit report is the first step to a healthy credit score. It is a reflection of your financial habits, and the way to find out the mistakes both on your and your creditor’s part. Therefore, besides analyzing your credit history, and delinquent accounts, also look for errors that are keeping you at bay from enjoying the benefits of a good credit score while reading your credit report.
4. Keep Credit Utilization Low
Even if you pay your bills on time, maintaining a credit utilization ratio below 30 percent is imperative. It applies not only to the credit utilization ratio on a single credit card but also to the total credit utilization ratio of all your credit cards taken together. Similarly, keeping your debt to income ratio low is also important, as it is the way to present yourself as a low-risk borrower among your lenders. To improve your debt to income ratio you either need to decrease your debts or increase your income.
The Bottom Line
Though the sacrifices of veterans are priceless, and no reward can take its place, VA loans are definitely a great initiative by the US government to honor their contribution. The financing program, since its introduction in 1944, has helped more than 20 million veterans purchase a home. However, as the U.S. Department of Veterans Affairs does not issue these loans directly, a credit check is part of the lending process followed by most lenders. While it is not always easy for veterans to build a strong credit profile, the tips shared should help you to maintain a good credit score, and get a VA home loan with ease.