Having a responsible credit history is one of the key components we use when reviewing a loan application. Traditional guidelines for VA home loan approvals mean having established a credit history with a minimum of three trade lines appearing on the report. This is a common requirement for most all loan programs including conventional and government-backed. Government-backed loans are those that fall under VA, FHA and USDA guidelines. Both a credit report is pulled and credit scores are requested as well. Credit scores are those three digit numbers that range from 300 to 850 with the higher scores representing a higher credit grade.
Credit scores look at the payment history of trade lines primarily over the past two to three years. When borrowers make their payments on time, or at least don’t make any payments more than 30 days past the due date, scores improve. Keeping account balances relatively low compared to credit limits also help to improve scores. The three other factors that make up a credit score include how long someone has used credit, the types of credit used and looking at any recent credit inquiries. These five factors make up the credit scores used when approving a loan application. The three main credit repositories of Equifax, Experian and TransUnion all use the same algorithm and provide their own score. The scores will be similar but rarely are they exactly the same. When we receive these three scores, we throw out the highest and lowest and use the middle score for qualifying purposes.
But what if someone doesn’t have three scores? What if someone wants to buy a home and use their VA eligibility but only has one score? Or no scores at all? That’s where I come in. I have a special loan program designed for veterans that not only doesn’t require a minimum credit score but can be used for an approval for those without any scores at all.
It’s a VA loan program where we can use what is referred to as “non-traditional” credit. Non-traditional credit looks at other monthly payment obligations that wouldn’t appear on a regular credit report and therefore wouldn’t produce any credit scores. What qualifies as non-traditional credit? We can look at electricity bills over the past 12 months to see if payments were made on time. Utility companies provide us with a payment history that shows a responsible payment pattern. Mobile phone bills can also be used as well as a cable TV account. Finally, we’ll look at rental payments over the previous 12 months to establish timely rent.
This special VA loan is available for a zero down loan up to $453,100, owner occupied only. The debt to income ratio is also the same for a standard VA loan at 41 and for cash to close requirements, gift funds from eligible sources can be used to help offset part or all of necessary closing costs. If you or someone you know wants to buy a home and use their VA home loan benefit but don’t think they can due to a lack of a reported credit history and credit scores, I have the answer.