Credit Considerations for VA Buyers When Shopping for a Mortgage

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.

Here we take a deeper look at both of these topics. If you have any questions, don't hesitate to ask in the comments below.

Hard vs. Soft Credit Inquiries

A hard credit inquiry is when a lender requests a credit report after a borrower applies for a new line of credit, such as a mortgage, auto loan or credit card. Hard inquiries can impact your credit score, and the requestor must have your consent to perform a hard inquiry. Consent typically comes in the form of a checkbox or submit button when applying online.

Conversely, a soft inquiry is a credit check that doesn't impact your credit score or lead to new credit obligations. You're not applying for credit with a soft inquiry.

One of the most common soft inquiries is when consumers check their own credit reports. Obtaining copies of your credit report from Annual Credit Report.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.

Hard vs. Soft Gray Areas

There are also times when the line between hard vs. 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.

Mortgage Credit Scores and How They Differ

A second confusing aspect concerning credit scores stems from lenders looking at different scoring models than what you receive from 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 education 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

Consumers don't have one credit score because they don't have a single credit profile.

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 Annual Credit Report.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.

Interested in learning more? Read more about the VA's minimum credit score requirements here.