Your Credit Score and Your VA Loan
A credit score is a mathematical calculation that assigns a number for you between 300 (worst scenario) and 850 (best scenario). This number is used to determine an individual's credit worthiness and the likelihood that you will pay your debts. The lower your score the “riskier” lenders view you therefore the harder you'll likely find it to get a loan.
VA Loan Providers typically shy away from anyone with a FICO Score lower than 620. Even though a score of 620 is the lowest threshold most lenders will consider 680 is what you should shoot for. For those looking to take advantage of buying a home at historically low prices this could impact your ability to get your dream home while prices are low. Or, for those paying higher interest rates than currently available, this could limit your ability to refinance.
The good news is if your score is less than favorable there are some immediate activities that you can take to improve it:
- Keep Low Credit Card Balances: Credit utilization rate is the balance of your credit card debts divided by your credit card limits. For example, your combined credit cards have a limit of $10,000 and you are carrying a $3000 balance. In this scenario you have a 30% credit utilization. The lower your percentage the better and 30% or below is good to shoot for.
- Clear-up Mistakes: It is estimated that 1 out of 4 people have mistakes on their credit report. If you find a mistake in your report you should contact the credit bureau immediately. Then, send a letter including your personal information and description of each item that you dispute. You can obtain a free report from all 3 of the major credit agencies with www.annualcreditreport.com.
- Pay Your Debts: This goes without saying that if you are late on your payments it will bring down your score so it's important to pay your bills on time. Aside from this, credit scores tend to have a greater impact when paying off your new debt before your old.
- Raise Your Credit Card Limit: By raising your credit limit this reduces your credit utilization rate. It is important however that once you raise your credit limit that you don't place more on your credit cards as a result. You can contact your credit card companies that you currently have cards with and ask for an increase.
Overall, there is no silver bullet that impacts your credit scores. It's always best to practice good financial management. Living below your means by not spending more than you take in, limiting credit card balances, and paying your bills on time are good fundamentals that provide for a solid credit foundation.