How Credit Scores Affect Mortgage Rates on a VA Loan

Marcus Marion, CMA™ 2 weeks ago 0 11

The Department of Veterans Affairs does not require a minimum credit score for the VA home loan program. But having a good score could help you qualify for a mortgage loan and possibly secure a lower interest rate as well.

This guide explains what credit scores are, how they can affect the mortgage rate on a VA loan, and how you can increase your score if it happens to be low.

What Is a Credit Score, Exactly?

A credit score is a three-digit number banks and lenders use to assess your “creditworthiness,” or how likely you are to repay a loan on time. It’s like a report card for your borrowing behavior. The higher your score, the more attractive you are as a borrower, which can translate into a lower mortgage rate.

Your credit score is based on information found within your credit reports, including payment history, amounts owed, length of credit history, types of credit used, and new credit inquiries. 

If you’ve taken out loans or credit cards in the past, you probably have three different credit scores. That’s because there are three credit-reporting agencies in the U.S. that compile this kind of information—Equifax, Experian, and TransUnion.

Mortgage lenders use credit scores as a kind of risk indicator. Lenders want to ensure that they’re making loans to borrowers with a high likelihood of repaying. They use a variety of information to determine this, and that includes the borrower’s credit score.

There are different credit-scoring models available these days. Mortgage lenders often use the FICO scoring model, which ranges from 300 to 850.

How It Affects the Mortgage Rate on a VA Loan

When you hear about “mortgage rates” in the news, they’re usually talking about the nationwide average rates reported by Freddie Mac. But on an individual basis, mortgage rates can vary from one borrower to the next, and sometimes significantly.

Mortgage rates are not the product of one factor alone. Banks and lenders use a number of variables to determine the interest rate they assigned to VA loans.

Here are some of those influencing factors:

  • Credit Score: A higher credit score often leads to lower mortgage rates.
  • Down Payment: Larger down payments may result in lower rates.
  • Loan Term: Shorter loan terms typically have lower rates compared to longer ones.
  • Type of Loan: Fixed-rate loans may have different rates than adjustable loans.
  • Discount Points: Paying points upfront can lower the interest rate.

If you’re planning to apply for a VA loan in the near future, you might want to check your credit scores to see where you stand.

If you discover you have a score in the 750 range or higher, you’re already in good shape. A score in that range could help you qualify for a VA loan with a highly competitive mortgage rate.

On the other hand, if your score is in the low-600 range or lower, you might benefit from boosting it before you apply for a loan. So let’s talk about how to do that.

How to Increase Your Credit Score

Despite what some websites might tell you, there is no “secret formula” for increasing a credit score. All you have to do is address the factors that influence your score, and in a positive way.

Here are those five influencing factors, according to the company that created the FICO credit-scoring model:

  • Payment History (35%): This is the most important factor and shows how reliably you’ve made payments on your credit accounts in the past.
  • Amounts Owed (30%): This includes your total debt and your credit utilization ratio (i.e., the amount of credit being used compared to the limit).
  • Length of Credit History (15%): A longer history with on-time payments can positively impact your score.
  • New Credit (10%): Applying for too much new credit in a short period of time can potentially lower your score.
  • Credit Mix (10%): Having a mix of credit accounts, such as installment loans (e.g., car loan) and revolving credit (e.g., credit card), can be beneficial.

As you can see, your payment history “weighs” more than any other factor. It can also affect your ability to qualify for a VA loan with a good mortgage rate. That’s why it’s so important to pay your bills on time and in full.

“Amounts owed” refers to the total amount of money you owe across all of your credit cards and active loans. It’s not bad to owe money. In fact, making timely payment payments on your debts is how you establish a positive credit history in the first place.

But owing too much money, relative to your available limits, can hurt your credit score. So if you’re currently “maxed out” on your credit cards (or approaching that limit), it’s probably having a negative effect on your score.

Here’s what you should take away from all of this:

You can build a good credit score by making all of your payments on time and by limiting your credit usage. A higher score could help you secure a lower mortgage rate on a VA loan, which could reduce your monthly payments and total housing costs.

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