How VA Lenders Calculate Your Mortgage Credit Score

Having a good understanding of how credit scores work can make the VA loan process much less stressful. Two topics that can confuse homebuyers are the differences between hard and soft credit inquiries and how mortgage credit scores differ from educational scores.

This guide breaks down both topics clearly and also explains what common credit-report entries mean when you apply with a VA lender.

A hard credit inquiry occurs when a lender requests your credit report from a credit reporting agency for a new line of credit, such as a mortgage, auto loan or credit card. Hard pulls can temporarily affect your credit score, and lenders must have your permission to run them. In most online applications, that consent comes from clicking a checkbox or submitting the form.

A soft inquiry, on the other hand, doesn’t affect your credit score and doesn’t involve applying for new credit. Soft pulls happen when you check your own credit, when a company pre-screens you for offers or when employers or insurers run certain background checks. Obtaining copies of your credit report from AnnualCreditReport.com or monitoring your scores via other applications and websites won't affect your credit.

Other soft credit inquiries can include:

• Credit card companies checking your credit to send you preapproved credit card offers
• Employers conducting background checks
• Insurance companies and other firms that want to offer products, goods or services

Third parties can conduct a soft inquiry without your knowledge or permission. Soft credit pulls may show up on your credit report, but they're not playing a role in your overall credit score.

The major distinction between soft and hard credit inquiries is that only hard inquiries can impact your credit score.

Hard vs. Soft Gray Areas

There are also times when the line between hard and soft inquiry isn't clear.

Some of the potential gray areas include:

• Cell phone contracts
• Establishing utilities in a home or rental
• Apartment and home rental applications
• Setting up a bank account
• Renting a car

To be safe, you can always ask whether the credit inquiry will be hard or soft.

More: 4 Credit Questions VA Lenders Will Ask You

Mortgage Credit Scores and How They Differ

A second confusing aspect of credit scores is that lenders may set minimum VA credit score requirements that differ from the scores you see from free credit monitoring services, such as Credit Karma or Mint.

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 mortgage lending, FICO credit scores still reign supreme. When lenders pull your credit, they usually look 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:

• Equifax Beacon 5.0 (FICO Score 5)
• Experian/Fair Isaac Risk Model V2SM (FICO Score 2)
• TransUnion FICO Risk Score, Classic 04 (FICO Score 4)

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, mortgage credit scores use a different formula than generic or educational scores from credit monitoring services.

It's common to see differences between the two types, which can be startling and sometimes frustrating for prospective VA buyers.

In some cases, the gap may have little impact. But in others, this discrepancy can mean the difference between getting preapproved for a VA loan and putting your homebuying dreams on hold.

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.

The only way to see your mortgage credit scores is to have a mortgage lender pull them.

Educational vs. Industry-Specific Scores

You don’t have one universal credit score because:

1. Creditors report to different bureaus, so each bureau’s file can vary.
2. There are dozens of scoring models, including mortgage, auto, credit card and generic educational versions.

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. Conversely, 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 of credit scoring models. Some 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 different scores than a mortgage lender.

Credit Monitoring is Key

There's still tremendous value in regular credit monitoring, whether through an app or tool or by getting free copies of your credit reports from AnnualCreditReport.com.

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.

If you’re ready to take the next step, connect with a Veterans United Home Loan Specialist to review your credit, explain your mortgage scores or guide you through the VA loan process with confidence.