Tips for Building Credit

Your credit score plays an integral part in your eligibility to receive a VA home loan. It not only helps determine approval for the loan, but also aids lenders in weighing a borrower’s risk factor and ability to repay the loan, plays a role in the interest rate you qualify for, and protects prospective homebuyer’s from borrowing more than they can manage.

A credit score is a three-digit number that determines your creditworthiness and measure how likely you are to repay a loan on time. Your credit score is based upon your history of repaying debt, and factors heavily into lenders deciding if you are responsible about paying your bills on time. The higher your credit score is, the better the chances are that you will be approved for a loan.

There are five major elements that make up your credit score:

• Payment history
• Amounts owed
• Length of credit history
• New credit
• Types of credit used

Who determines credit scores? In the United States, there are three major credit bureaus: Equifax, Experian and TransUnion. These credit-rating agencies collect positive and negative financial information about your credit accounts to determine your credit score.

Why is a credit score important? Your credit score can be one of your most valuable assets because it plays such a large role in your financial future. Your score can also affect the interest you pay on your loans. The higher your score, the less interest you will likely have to pay.

How does your credit score help secure a mortgage? Before the use of scoring, the credit granting process was sometimes slow and inconsistent. Credit scores have made big improvements in the credit process. Scores can be delivered almost instantaneously, helping Fairway speed up loan approvals as many credit decisions can be made within minutes. With more credit available, the cost of credit for the borrower decreases. Automated credit processes, including credit scoring, make the credit-granting process more efficient and less costly for lenders who, in turn, pass savings on to their customers. By controlling credit losses using scoring, lenders can make rates lower overall.

Worried about credit inquiries affecting your credit score? When you apply for a home mortgage loan, your Loan Officer will check your credit score. This is reported to credit agencies as an inquiry and lets creditors know that you are considering taking on new debt. When an inquiry is made, is has a small but negative effect on your credit score. However, inquiries are a mandatory part of applying for a home loan, so they cannot be avoided.

Inquiries made within a 45-day window are only recorded on your credit report as a single inquiry because creditors understand that you are only going to buy one home. This means you can have multiple lenders check your credit as long as it is within 45 days of the initial inquiry. This 45-day window only applies to mortgage loans; credit card and other credit inquiries are processed separately.

Quick tips on how to build your credit:

• Only borrow what you can afford to repay. Making a habit of only borrowing what you can afford will ensure that you can pay the money back in a timely manner. This allows future creditor and lenders to know that you are a responsible borrower.
• Use only a small portion of the credit you have available to you. It is never a good idea to max out your credit cards. This is especially true if you do not pay off the entire balance each month. Experts say it is best to stay below 50% of your credit limit, but staying below 30% will build your credit even faster.
• Make your payments on time. The best bet is to pay your bills on time each month to avoid debt collection and late payments.

VA Loan homebuyers who fall below the required credit score shouldn’t give up the dream of homeownership. Repairing credit can be complicated, particularly if you don’t know what corrections to make. At VA the Fairway, our VA loan experts are very knowledgeable at offering suggestions to help you improve your credit score and put you on the right track to purchasing your home. Should you need more than a few suggestions to accomplish this goal, we have an entire department of credit experts that can be of assistance as well.