Rebuilding your credit for a VA home loan

by Shelton on February 9th, 2015

filed under Credit Scores

Buying a home and financing it with your VA home loan benefit is an exciting time. Yet not so exciting when the borrowers find out their credit score is too low to qualify for a mortgage. In fact, its very disappointing. VA loans are more forgiving as it relates to credit scores compared to other loan types but there are minimum standards that the VA requires and it is incumbent upon the VA lender to independently determine the veteran has demonstrated a responsible credit history.

The VA does not establish a credit score requirement, only that the lender must determine creditworthiness. Lenders use credit scores as an indicator of the likelihood of defaulting on the loan with scores ranging from 300 to as high as 850. The higher the score, the better the credit and while the VA doesnt have a score requirement, most VA lenders do set the minimum at 620 or 640, depending upon the lender.

How scores work

Credit scores are a reflection of past credit patterns, with emphasis on the most recent two year period. The older the credit, the less important it is. The calculation is a result of applying an algorithm developed by Fair, Isaac Corporation, commonly known as FICO. Businesses report the payment patterns of their customers to one or all three of the main credit bureaus, Equifax, TransUnion and Experian.

These bureaus use the FICO method to produce the three digit score and while the three scores are usually similar they are very rarely exactly alike. This variance is due to the reporting requirements and dates the information is delivered to the three bureaus. When a veteran applies for a VA loan and credit is pulled, the credit scores may read something to the effect of 741, 738 and 745. Which score does the lender use? VA lenders throw out the highest and lowest score and use the middle one for loan evaluation.

There are five categories that comprise a score and they are;