Credit Basics for VA Borrowers
by Chris Birk, Director of Education, Veterans United Home Loans
Buying a home is a big, exciting step for you and your family, and as with any milestone, purchasing a home is a process. You’ve likely heard how important credit is in home buying.
It helps to think of it like this: They are a package deal, like tape and wrapping paper — if the tape isn’t strong, the wrapping paper won’t hold.
VA loans are a great option for this very reason: They are more flexible and forgiving than other loan types. In a time when lenders are requiring stricter guidelines and tight credit, many military families have found their application approved and themselves in a new home because of the VA loan program.
One big reason is you don’t need perfect credit. Actually, you don’t need anything near perfect credit. A “good” credit score is generally 720. A “fair” score is 620.
With a conventional loan, some lenders may approve buyers with a minimum score of 660. However, in order to get anywhere near the best rates and terms, conventional borrowers are likely better off entering into the process with a score closer to 740. In comparison, many VA lenders are looking for a 620 FICO score. These government-backed loans are also more lenient in the wake of a bankruptcy, foreclosure, or short sale.
Veterans and active military who filed for a Chapter 7 bankruptcy must wait four years after discharge before they can be approved for a conventional loan. But with a VA loan, buyers can be approved after a two-year wait.
A Chapter 13 bankruptcy has an even shorter wait time for a VA loan--as few as 12 months after the filing date.
In both cases, it is important to remember to keep a clean credit record and have no late payments following the bankruptcy.
After a foreclosure, the typical wait time (also known as a seasoning period) is two years for a VA loan. But for buyers seeking a conventional loan, the average wait is seven years from the foreclosure date. That’s a significant amount of time keeping you and your family from moving forward.
For a short sale, there is no VA guideline that states borrowers must wait two years before being approved for another loan. Often short sales are lumped in with foreclosures, and while many lenders require the two-year wait, there are some that have no seasoning period whatsoever.
It can be tough for military families to maintain fair credit. Moving around can do a number on your planning, finances, and, therefore, your credit.
A key first step is to know your credit. Get free copies of your credit reports from AnnualCreditReport.com and check them for errors and inconsistencies. The stronger your credit, the better interest rate and more competitive offers you may be able to get.
Here are a few tips for improving your credit score:
• Keep balances low. Aim for 30 percent or less of your total available credit.
• Pay your bills on time. This may seem like common sense, but missed payments can happen to even the most organized person, and they can add up.
• Don’t co-sign on loans for other people.
When you view your credit score, know that the number you see may differ from the number your lender sees. This is because there is no universal credit score. Different methods of scoring are used depending on the type of loan product or credit for which you are applying.
Even if the two figures are different, knowing your score in advance will give you a general idea of where your credit stands and what work, if any, you have ahead of you.
Research your options before moving forward with one of the biggest decisions in your and your family’s life. Know your credit. Improve your financial situation. And good luck with the move.