Check (and Repair) Your Credit

Veterans and military buyers can face unique credit challenges. That’s a big reason why it’s important to get your credit in shape before starting the home-buying process.

Credit scores are symbols of your ability to repay debts. They’re also a make-or-break requirement for mortgage lenders.

A mortgage credit report will typically contain three scores, one from each of the major credit-reporting agencies: Equifax, Experian, and TransUnion. Your lender will use the median, or middle, score for the purposes of home loan pre-approval.

Your credit scores can also play a role in what it costs to borrow. The stronger your credit profile, the more likely you are to secure financing with a great interest rate.

Credit score requirements aren’t as stringent as they once were. But it can still be tough for some veterans and service members to secure conventional financing. Conventional lenders often require a 660 FICO score, but you’ll usually need a much higher score to access better interest rates.

The benchmark for VA lenders is usually lower, often around a 620 FICO, and credit scores have far less impact on rates for government-backed loans.

So, knowing all this, where should you begin?

Create good habits

Depending on how you use it, your credit can make or break your finances. Establishing healthy habits is crucial for building a strong credit profile.

People with excellent credit tend to share some common traits, including the following:

• Staying on top of monthly payments: Slow and steady wins the race here. Remember, it’s all about building a history of on-time payments. Creditors won’t usually report late payments until they’re 30 days past due. Your credit score can continue to take deeper hits as outstanding balances cross the 60-, 90-, and 120-day marks.
• Keeping credit card balances low: Having high balances on multiple credit cards tells lenders you’re pushing your credit (and possibly your finances) to the limit. That isn’t a good place to be when you’re thinking about taking on a mortgage. Try keeping your balances under 30% of your credit limit.
• Avoiding slews of credit inquiries: Try to limit hard inquiries on your credit report. These might cost you only a few points, if any, but multiple inquiries within a short period of time can be problematic. Sudden credit grabbing can be a sign of financial instability.
• Avoiding opening and closing accounts: When you start thinking about buying a home, it’s best to keep from making big changes to your credit unless you’re absolutely sure of the impact those changes could have on your scores. New accounts come with new monthly obligations that can eat into your house-buying budget. And while it’s usually a good idea to free up space on existing credit accounts by paying them down, closing an account can actually lower your credit scores.
• Taking care of derogatory trade lines: Unresolved issues on your credit report can cast a shadow over your home-buying chances. Don’t leave outstanding balances unpaid, and be sure to resolve any matters of public record as soon as possible. Issues such as tax liens and landlord disputes will not only damage your credit scores, they’ll also usually need to be resolved before you can close on a home.

Review your credit report

Consumers have a right to receive three free credit reports each year, one from each of the major reporting agencies. By requesting one report every four months, you can keep an eye on your credit activity throughout the year. You can get your reports and find more resources at AnnualCreditReport.com.

But you might be surprised by what’s not on those reports: your credit scores. Unfortunately, you’ll have to spend money to get a look at anything resembling the credit scores a mortgage lender sees.

While your free report won’t include your credit scores, it can give you a good indication of where you stand and what might need some work. More importantly, keeping track of your credit can tip you off to any errors, outstanding derogatory accounts, or signs of fraud.

Financial scammers frequently prey on veterans, service members, and their families. Keep an eye out for these red flags on your credit report:

• Discrepancies in your basic information
• Incorrect address history
• Accounts you don’t recognize
• Falsely reported late payments, collections, or items of public record
• Inquiries that you didn’t initiate

Report any errors or inconsistencies on your report to each of the three major reporting agencies and the creditor. Be sure to do so by phone and in writing.

Paying your bills on time, keeping account balances low, and keeping a close eye on your credit report can go a long way toward helping you build mortgage-ready credit.

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This article was written by Chris Birk, director of education at Veterans United Home Loans and author of “The Book on VA Loans: An Essential Guide to Maximizing Your Home Loan Benefits.”

NMLS 1907 (www.nmlsconsumeraccess.org) Veterans United Home Loans is not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency; does not reflect DOD endorsements. Equal Opportunity Lender. 1400 Veterans United Drive Columbia MO, 65203.

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