How to Improve Credit for a VA Loan

Ask any lender what you should do to improve your credit for a VA loan and you’ll get some fairly standardized answers; pay on time, cut your debt, and avoid new lines of credit. But why is this advice the gold standard for getting a better deal on your home loan?

Because even with a VA mortgage, which has no VA-defined FICO score minimums and leaves it up to the lender to decide if your scores are acceptable, you still must credit-qualify the same way you would for any major loan. And the better your credit is, the more affordable your loan will be over the lifetime of the mortgage.

Improve Your Credit By Starting Early

Credit scores do not, and cannot improve overnight. Your credit score is affected by a variety of factors up to and including whether or not you have unresolved issues on your credit report related to identity theft, erroneous information, outdated entries, etc.

Fixing problems with your credit report and scores takes time–if you aren’t giving yourself at least 12 months ahead of time to save and prepare, you may not be fully ready for your loan at application time.

Free Credit Reports And Monitoring

Depending on the company, you may be entitled to free credit monitoring (via credit reporting agency services offered by Equifiax, TransUnion, and Experian) due to widespread compromises of private data following hacking at these companies. Review the official sites of each of the “big three” credit agencies to see what is on offer currently, and don’t forget to pull your free annual credit report via the government’s only official website for those free credit reports.

Improve Your Credit By Knowing What Affects Your Score

When you apply for new credit, two things happen–you open yourself up to a larger amount of potential debt, and you get a hard inquiry into your credit report. Hard inquiries do negatively affect your FICO scores, and multiple hard inquiries in a short amount of time may be a red flag to your lender.

Both of these issues are not lost on your participating VA lender, who may pull your credit report more than once during a loan application and approval process.

Did you know that your lender may review your credit report another time after loan approval but before closing? Any new credit applications in the year leading up to the loan including AFTER loan approval can be a source of trouble for borrowers waiting to close their mortgage loan.

How On-Time Payments Affect Your Credit

Late and missed payments in the 12 months leading up to your loan application will seriously hurt your chances at loan approval. Barring that the damage late and missed payments does to your credit score makes the issue of your on-time payment record a very important one.

Late or missed rent, mortgage payments, or other housing obligations make it very hard for the lender to justify you as a good credit risk.

An absolute minimum for all borrowers? Come to the VA mortgage loan or refinance loan process with no fewer than 12 months of 100% on-time payments on all financial obligations. This raises your credit score over time and shows the lender you are serious about your mortgage commitment.

Pay Down, But Do Not Close, Your Credit Accounts

A common myth about credit repair–especially the work you do on your credit without hiring a third-party agency to do it for you–is that you should pay off and then close your old credit accounts. But this is actually bad advice. Yes, pay down your accounts, but NO, do not close them.

The age of your credit is an important factor where your FICO scores are concerned. Having an older, low-balance account is good especially if your outstanding balance only adds up to 30% of your credit limit.

Aim for under 50% of your credit limit when trying to reduce your debt ratio, but know that the 30% balance is considered ideal. Again, do not close old accounts–just pay them down to the 30% level and move on. Your lender and your credit report will recognize this as responsible credit use.

Pay Credit Balances Before the Statement Closing Date

Before applying for a va loan make a payment to your account before your card’s statement closing date, instead of on or before its payment due date. Card issuers typically report the statement closing date balance to the credit bureaus on the statement date. Thus, even if you pay off your credit balance before the due date your credit report may still show a balance that will effect the utilization percentage used to calculate your credit score. This is true even if you pay off your balances monthly and never have a revolving balance.

Become an Authorized User on Another Person’s Account

Ask a willing relative, like a friend or mom or dad, to add you to one of their excellent credit cards as an authorized user. An authorized user has no responsibility for the repayment of debt but most scoring systems incorporate authorized user accounts into the calculation. Though, most may not weigh them as strongly as a primary account holder who does assume liability for repayment of debt, an authorized user account can add a scoring boost.

Working On Your Credit But Still Worried?

Some borrowers may have some rough periods in their credit history. Some borrowers may find that, depending on the housing market, personal circumstances, or other issues, can’t raise their credit scores as high as they would like ahead of the home loan application.

If you are applying for a VA mortgage to buy a suburban home, condo unit, mobile home, or even to have your house built from the ground up using a VA construction loan, it is expected that you know about the VA no-money-down option for your home loan.

But in cases where a borrower’s FICO score is lower than the lender would like, it is possible to still get home loan approval if you bring compensating factors to the negotiation. One of the most powerful of these factors is the ability to make a down payment–and borrowers who choose to make a down payment on a VA mortgage find other perks associated with that payment including a lower VA loan funding fee (depending on the amount you put down). Aim for 30% credit utilization or less.

Other Important Advice To Improve Your Chances At VA Home Loan Approval

Your participating VA lender is required to insure your current income is stable, reliable, and likely to continue.

That includes making sure that currently serving military members have either enough time remaining on their enlistment to justify the loan, or that those military loan applicants have made a commitment to reenlist.

Borrowers who have frequent job changes should keep in mind that changing from one type of income (salary or hourly for example) to a different form (commissions, contract work, freelance labor, etc) will be required in most cases to have a minimum amount of time earning the new income for it to be considered reliable and likely to continue.

If you have become self-employed in the last 12 months, or if you have had a job change that alters the way you earn and/or report income to the IRS, you may need to wait a minimum amount of time before the lender can approve your income. Ask your VA loan officer what that requirement may be as rules will vary depending on the lender.

Those who do not have a very long work history (12 months or less) may be required to wait until they have more time in the workforce.

Those who change jobs frequently due to the nature of that kind of employment should be ready for their lender to ask for copies of tax statements, proof of income, upward mobility where applicable, etc. Your lender needs to be able to justify you as a good credit risk–the longer you have been earning in your current capacity, the better.

Joe Wallace is a 13-year veteran of the United States Air Force and a former reporter for Air Force Television News