Do Veterans Need Credit for a VA Loan?
Credit is often on Veterans’ minds when they go to use their VA loan benefit. Are there credit requirements for a VA loan? What kind of credit are VA-approved lenders looking for? What if I’ve never used a credit card? Do I even need credit for VA loan approval? While credit is a factor for VA loan qualifying, you may be surprised to know how broad the term “credit” can be.
Under VA guidelines, it’s the approved lender’s responsibility (not the VA) to run a full credit report and to develop a borrower’s credit information for VA loan qualifying. So, the short answer is, YES, Veterans do need credit for a VA loan. But it doesn’t necessarily mean you need a long history of credit cards and paying off loans to be considered for a VA mortgage. Read on to find out what kinds of credit can be used when a lender puts together your credit information for VA loan approval.
Car Loans, Credit Cards, and Rent Help Build Credit History
Have you ever wondered what’s on your credit report? First of all, the credit report shows much more than just a score; it reveals to the lender the potential borrower’s credit habits. While the VA does not set minimum credit score requirements, the lenders do, the VA encourages lenders to review an applicant’s entire loan profile, which shows your history of repaying anything from car loans, credit card debt, student loans, and even rent—revealing to the lender the potential borrower’s credit habits. If you have a good record of consistently paying housing and other expenses, lenders often see that as a main indicator of how motivated you are to make your future mortgage payments.
Whether it’s rent or some other payment that appears on your credit report, this pattern can show a lender how well you are able to pay on time. The credit report can also show how long it takes someone to pay off short-term debts like credit cards, whether they tend to carry a balance or if they pay in full every month.
Tip: Paying on time consistently is one of the biggest tell-tale signs of a good credit risk, and it helps improve your credit score.
Past repayment practices are the best indicator of a borrower’s willingness to repay a potential new VA loan. That said, the VA encourages approved lenders to look at a borrower’s overall payment patterns rather than just isolated incidents of credit mishaps.
What if a Veteran Lacks Credit History?
Sometimes a borrower, for whatever reason, hasn’t established much of a credit history. Maybe they’re a cash-only type of person. Or maybe it’s a service member who’s been away on active duty and hasn’t used credit at all. Absence of credit history isn’t necessarily bad. And it likely won’t prevent someone from getting VA loan approval if the lender has other ways to determine a borrower’s willingness to repay a potential new mortgage.
There are other payment records that can be used to demonstrate how he or she might tend to pay obligations. Maybe you’re paying rent with cash every month and your landlord can verify it. Or perhaps you have utility bills you can show paid in full every month. These are just a couple examples of alternative payments that can demonstrate good payment history.
The VA-approved lender is obligated to develop your credit information using what’s available. If that’s a credit report, great. But if it’s other payment records, well that works too. In the end, credit is needed, but not every borrower has a long credit history to pull from.
What if Collections or Bankruptcy Show Up on a Credit Report?
Adverse credit events can happen to anybody. And they do show up on a credit report. If you have something in your past, like a debt that’s gone to collections or a judgement, don’t panic. Time may be on your side.
Generally, a borrower can reestablish satisfactory credit in as few as 12 months of good payments after the mishap. If multiple unpaid collections or late debt payments appear on a credit report, even those outstanding for years, you can reestablish satisfactory credit once those obligations are paid, and any payments on subsequent debts are made for at least 12 months.
So, after all is said and done, credit is needed for VA loan approval. But, as you can see, the VA gives some flexibility to lenders as to what they can consider when developing a borrower’s credit information.
