Gone are the days when practically anyone could get a mortgage (thank goodness) regardless of credit history, income or any documentation whatsoever. That short lived fad didn't last very long but it certainly took a toll on our economy. Yes, those loans and the lenders that made them are gone but the effects are still here.
VA loans however have been around since 1944 in some form or fashion and even though they don't require any money down from the borrower, they outperform all other mortgage programs in the market today by implementing the same VA loan guidelines over the years. Yes, VA rules have been tweaked to adapt to the current market but overall, the VA loan program has been a stalwart in the mortgage industry. And that includes how it views the credit history of the borrower.
VA Credit Reports
Like other industries, the credit reporting business and the way VA lenders evaluate a credit application have changed over the decades. Up until about 1998 when credit scores began making their way into a mortgage lender's approval process, credit reports were reviewed manually.
A lender would order a credit report and line by line review the amounts owed, the monthly payments and payment history, noting any late payments or collection accounts.
As credit scores evolved, soon VA lenders required a minimum credit score, with many VA lenders asking for a minimum 620 score.
Credit scores are calculated based upon the recent credit history of the borrower and is an algorithm that reviews payment history, available credit, credit inquiries, types of credit and length of the credit history. This three digit number ranges as low as 300 to as high as 850, the higher the score, the better the credit. A VA mortgage credit report will have three scores, one from each of the primary credit repositories, Experian, Equifax and TransUnion. VA lenders will use the middle score.
But what if the borrower has no credit history or very little? What happens?
Alternative Credit
VA lenders typically require at least three trade lines verified to show timely payment. There are traditional and alternative credit types. Traditional trade lines are reported on a credit report identifying the creditor and the payment history.
Alternative credit identifies other monthly obligations a borrower might have that will not be reported on a credit report.
Alternative credit can be established by providing evidence of timely payment to a phone company, the electric or water company or even automobile insurance. VA guidelines can accept alternative credit as long as there is at least a one year history of verified timely payments.
For example, a borrower using alternative credit to help qualify for a VA home loan can provide a 12 month statement from the electric company or water utility showing a payment history. Any regular monthly obligation can be considered when using alternative credit.
It's important to note here that while the VA doesn't have any minimum trade line requirements; most lenders do ask that at least two trade lines appear on a credit report. Once those two are verified, then alternative credit may be considered.
The VA knows that a credit report won't entirely tell the story of a borrower, especially someone who is just starting out in the consumer world. VA loans have the lowest default rate of any program, having good credit verified is essential in holding that special status.
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