Guest post by Chris Birk, Veterans United Home Loans
Military members are faced with unique financial struggles due to the nature of their service. They move frequently, making it challenging for other income earners in their family to maintain steady employment. Although the military often offers stipends and allowances to cover expenses, the transient nature of being in the service often makes it difficult to establish strong credit.
Recognition of that sacrifice is reflected in the flexibility of the Veterans Affairs (VA) loan program, which has helped more than 20 million veterans secure home financing since 1944. These government-backed mortgages feature more lenient credit and underwriting requirements than other loan types. Right now most VA lenders are looking for a credit score of at least 620 – that’s well below what you’ll need for conventional financing.
But even that 620 benchmark – which FICO considers merely “Fair” credit – can be tough for veterans and service members to hit. Here’s a look at a few ways prospective military home buyers can approach their credit profile and put themselves in the best position possible to utilize the home buying benefits earned by their service.
Consider Lines of Credit
Taking out small installment loans, such as an auto loan, or using a credit card regularly and responsibly can both improve a credit score. However, that doesn’t mean military members interested in purchasing a home should begin pulling out small lines of credit left and right to obtain credit. In fact, doing so can actually hurt your chances of securing financing.
Instead, military members should practice foresight. If during service you decide you want to buy a home in the future, consider managing a line of credit or two before you even begin seeking preapproval for a home loan. Paying a car off before a home loan will not only help boost your credit, but it will also help you determine whether or not you’re financially responsible enough for a mortgage.
While having credit is important, it is even more important that you pay those bills on time. A delinquent account only takes 30 days to negatively impact your score, but takes much longer to clean up. Your overall payment history makes up 35 percent of your credit score, and late payments can seriously ding your standing. So in order to help you keep on top of your credit, pay your bills on time. Veterans who are having trouble paying bills due to deployment or other service-related issues may have various support networks and even laws that protect them. Seek help if you find yourself financially strained.
Check Your Credit
Credit scores can contain surprises if they aren’t regularly monitored. To make sure that your current actions are building and not hurting your credit, be sure to check your credit on a regular basis. You can get one free copy of your credit report every 12 months from each of the three major credit bureaus at AnnualCreditReport.com. Go over your reports in detail and look for errors, delinquencies and other red flags. Studies have shown that about 1 in 4 credit reports have errors that are serious enough to keep you from obtaining credit. Find and dispute inaccuracies immediately.
Keep Your Credit Card Balance Low
Keeping your credit balances at healthy levels is a crucial step toward building and maintaining a solid credit score. Ideally, you want to make sure your balance is about 30 percent or less of the credit limit, both for individual credit cards and your overall credit amount. For example, if you have a $1,000 credit limit on a card, keep the balance at or below $300. If you have $10,000 in total available credit among all your cards and accounts, keep the cumulative balance at or below $3,000.
Mistakes and missteps happen. The key is to learn from that missed payment or maxed-out card. Use those blemishes as motivation to repair and maintain your credit profile as you set out on the journey of home ownership.
About Chris Birk, Veterans United Home Loans
Chris Birk is the Director of Content Development for Veterans United Home Loans and author of “The Book on VA Loans: An Essential Guide to Maximizing Your Home Loan Benefits.” Connect with him on Facebook at VA Loans Insider or on Google+
Note: This is a guest post; the views and opinions expressed are those of the author and do not necessarily reflect the opinion or position of Redfin.