How Your FICO Score Will Affect Your VA Loan
When it comes to talking loans, inevitably the conversation will turn to FICO scores. Somehow, these three little numbers have become, at least in borrowers' minds, the most important part of determining readiness to take on a mortgage.
While it's true that your credit score can be, and is, important to your mortgage, the truth is that it may matter less than you think, especially if you're planning on getting a VA loan.
VA Loans & FICO Scores
One of the main benefits of the VA loan program is that the VA itself does not have a set requirement for a minimum credit score.
However, because private lenders are actually the ones financing the loans, they're able to create their own policies regarding minimum credit scores. This is why you might encounter lenders who do have a minimum score requirement during your search for a VA loan.
But don't despair! Plenty of VA lenders are willing to work with you, even if you have low, bad, or no credit. These lenders recognize that there's so much more to a person's ability to repay a loan than just one number. Your credit score will still be a part of the equation—just not the deciding factor.
The right lender will look at your credit report, which is the information your credit score is based on, for any red flags. If they find any, a good lender will bring them up with you and let you share your side of the story. Oftentimes, if there is a good reason for why a payment was missed or why something went into collections, your lender will overlook those concerns.
FICO Scores & Interest Rates
Though your FICO score might not prevent you from qualifying for a VA loan, all lenders will use it to help determine the interest rate they offer you. In general, the best rates are typically reserved for borrowers whose credit falls in the excellent to good range:
800–850 = Excellent
740–799 = Good
670–739 = Fair
580–669 = Poor
<579 = Bad
The reason for this difference is that lower scores generally indicate a higher risk. Lenders want to know that you'll pay them back. If you're more of a risk, charging a higher rate allows them to cushion the financial blow they'll experience if you default.
How FICO Scores Are Calculated
The three main credit bureaus—Equifax, Experian, and TransUnion— all use slightly different formulas to calculate your credit score. However, all three of them use the same five contributing factors:
Payment History – 35%
Amount Owed – 30%
Length of Credit History – 15%
New Credit – 10%
Credit Mix – 10%
As you can see, the biggest factor affecting your score is your payment history, which includes things like derogatory payments and collections accounts. Amount owed is the next largest, and primarily reflects how much of your available credit you're using. Ideally, you'll want to keep this ratio below 25–30%.
The other three factors reflect the average age of your credit accounts, how much (and how recently) you've opened new credit lines, and the different types of credit accounts that make up your credit portfolio.
How to Improve Your FICO Score
If you currently have bad, poor, or even fair credit, it never hurts to wait a bit before diving into such an expensive and long-term financial commitment. Just make sure you're using the extra time to actually improve your FICO score.
Though there are lots of ways to increase your score, these five tips will help you get started:
Never pay late on any credit account
Pay down the balance on any credit card so it's less than 30% of your credit limit
Don't open any new credit accounts, if you can
Check your credit report for errors & dispute them
Become an authorized user on a credit card of a friend or family member with good credit, but don't actually use the card
Again, improving your credit score isn't always necessary to get a VA loan. But, because you'll be paying interest the entire time you have your mortgage, making sure your credit score is high enough to qualify for a lower interest rate can really impact how much money you end up paying for your home, especially long-term.
Sometimes credit and FICO scores seem overwhelming, even with all the right information. If you still have questions or concerns about your credit score, you can contact Low VA Rates, the feature home loan provider for PCSing.com.
As one of the nation's leading lenders for VA loans, we'll happily look at your credit score and offer our expert advice with no obligation! If you decide to wait to purchase your home until your credit score improves, we can even help you put together a plan that will make it happen.