VA Loans and Your Credit Report
VA loans have the lowest default rate of any loan program in the market today and have been that way nearly since the introduction of the program way back in 1944. Even when compared to FHA loans or conventional mortgages underwritten to Fannie Mae and Freddie Mac guidelines, VA loans historically perform better with fewer delinquencies. Even with no money down, VA loans still shine. One of the variables that VA lenders review is the credit report. What’s in your credit report and how do you read it?
There are three main credit repositories, Equifax, Experian and Transunion that serve as a database for consumer borrowing activity. Beyond this, there are credit reporting companies that provide lenders with credit reports with data pulled from these three repositories and while there are different formats, they all contain the same basic information.
Balances and Limits
The total amount of debt that you currently owe and available credit lines is the most visible and shows each credit account in your name, how much you owe and the maximum credit line. For revolving accounts such as credit cards, the report will show a credit limit and for installment loans, it will show the highest balance along with the minimum monthly payment.
The accounts that are active will be listed first and the accounts that are dormant or closed will be listed later. After seven years of no activity, the closed accounts will ultimately fall off the report.
For example, say you have a credit card with a $10,000 credit line and a $2,000 balance. The report will read something like:
In addition to your creditors, payments and balances is information regarding your payment history. Credit reports will show if any payments were made 30 days past the due date on the account. In addition, payment patterns will also be reflected with payments made more than 60, 90 or 120 days past the due date.
Sometimes consumers make a payment on the 16th when the payment was due on the 10th and is considered “late” by the creditor and a late fee will likely be charged. However, the credit report won’t show the payment as late because it was not more than 30 days past the 10th of the month.
The credit report will also show when the last payment was made and the minimum amount the creditor requires each month.
Credit inquiries is a listing of creditors who have looked into your credit report at your request. For example, if you applied for a mortgage and last month you also bought and financed a new car, then your credit report will list two credit inquiries. Why do VA lenders care about inquiries?
When determining affordability of a mortgage, lenders evaluate your current income and debt load. Because information on a credit report can be at least 30 days old, it’s possible that your new car payment won’t appear on the credit report until next month. That could affect your ability to repay your mortgage. The lender wants to know a little more about that inquiry on the report.
Finally, your credit scores are listed with each repository providing its own. Credit scores are factored based upon a consumer’s recent credit patterns and take into consideration the categories mentioned in this article, payment history, amounts owed, inquiries and so on. There will be three credit scores and the VA lender will toss out the highest and the lowest and use the middle score for purposes of approving the loan. The VA does not issue guidelines regarding a minimum credit score but most VA lenders do, and that minimum score is 620 but can vary from lender to lender.
Additional information about you is found on your credit report including where you’ve lived and worked along with any public records associated with your name.
If you want to take a look at your credit report before applying for a mortgage, you can get a free report at www.annualcreditreport.com, a site sponsored by the three main credit repositories. Otherwise, once you apply for a mortgage, your lender will send you a copy of what they see. If you have any questions or see some obvious errors, call your VA loan officer for help.