Keeping an eye on your credit score is a good habit to keep, especially when looking to buy a home. There are a few different types of credit scores your VA mortgage lender will look at when evaluating your finances, and several terms you should be aware of.
More and more veterans and service members are using credit-monitoring tools and apps like Credit Karma and Mint to keep close tabs on their credit profiles.
That’s a great step to take before starting the homebuying journey. Monitoring your credit reports can help identify problems that could keep you from landing a VA loan.
But it’s important to understand that the credit scores these tools and apps provide aren’t the same scores a mortgage lender sees when they pull your credit.
It can come as a shock when you think you have a 640 credit score, only to be told by a mortgage lender that it’s actually 615.
In some cases, the gap may not have much of an impact. But in others, this discrepancy can mean the difference between getting prequalified for a VA loan and having to put your homebuying dreams on hold.
In part, consumers don’t have one credit score because you don’t have just one credit profile.
Some of your creditors might report your usage and payment history to all three of the nation’s major credit bureaus: Equifax, Experian, and TransUnion, while others might report to only one or two of them. Your credit profile might look different to each of the three big credit bureaus.
The other big reason is that there are dozens upon dozens of credit scoring models.
Some of those models are more “generic” or “educational” in nature, while others are laser-targeted for certain forms of credit, like mortgages, auto loans and credit cards. A mortgage lender, a car dealer and a credit card company could all pull your credit and come up with nine different versions of your credit score. That’s three creditors getting three different scores from the three different credit bureaus.
This key distinction between generic and industry-specific scoring models helps explain why a credit monitoring service might show consumers totally different scores than a mortgage lender.
For example, the three credit bureaus have their own generic scoring model, known as the VantageScore. Consumers who use Credit Karma see VantageScore credit scores from Equifax and TransUnion.
But in the world of mortgage lending, FICO credit scores still reign supreme. When lenders pull your credit, they’re usually looking at FICO scores specifically formulated for mortgage lending. These are known as mortgage credit scores.
The three credit bureaus offer different FICO formulas for mortgages, but the most common versions for lenders are:
Usually, lenders will get one mortgage credit score from each of the three reporting agencies and use the median (middle) score as your credit score for qualification purposes. Some mortgage lenders may have their own custom scoring models that factor the FICO mortgage scores into their overall formula.
In either case, the mortgage credit scores are based on a different formula than the generic or educational scores consumers get from credit monitoring services. It’s common to see a difference between the two types, which can be startling and sometimes frustrating for prospective VA buyers.
Generally, if your generic credit profile is in good shape, your mortgage credit scores will likely fall in line. Your educational scores are often a good indicator of your overall credit health. But the picture can get complicated for borrowers on the margins.
Credit score benchmarks can vary, but lenders are typically looking for a 660 FICO for VA loans. If your generic scores are right at or below that cutoff, you might need to boost your credit profile before heading into the homebuying process.
The only way to see your mortgage credit scores is to have a mortgage lender pull them. Talk with a Veterans United loan officer for more information.
There’s still tremendous value in regular credit monitoring, whether it’s through an app or tool or by getting free copies of your credit reports from Annual Credit Report.com. Don’t give up on educational credit scores, either.
Generic credit scores can be a helpful guidepost that gives consumers a good feel for their creditworthiness. In many cases, these scores will be in the same neighborhood as your industry-specific FICO scores. Seeing these educational scores go up and down, depending on how you use credit, also helps foster good habits.
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