Once they’ve decided to buy a home using their VA benefits, a common concern among servicemembers is whether they’ll qualify under VA’s credit guidelines. Often our servicemembers have preconceived notions about the minimum standard required to get a mortgage—sometimes they’re correct and sometimes they aren’t. The client’s tendency is to think they cannot get a VA loan, when in fact they can. This is largely because of a failure to realize that much of what concerns the client has already been “baked into the cake.”
Here’s what I Mean: The VA guidelines anticipate that in life Stuff Happens; and that in military life, Stuff Really Happens. Perfection isn’t necessary. For example, VA understands that the servicemember may have had 9 duty stations in 13 years, and that it may be unfair to compare the servicemember’s credit record with that of a civilian who has worked at the same job and location for 13 years without ever uprooting their family. Each time a military family moves there is an opportunity for something to fall through the cracks (like the last cable bill from the apartment near Camp Pendleton that somehow was not forwarded to the servicemember’s address in Quantico and ends up on their credit report as a collection account). To gain a VA loan approval, VA does not require payment of relatively small isolated collection accounts. Again, certain benefits and concessions are baked in for VA loan applicants.
With that said let’s undertake a general review of VA credit guidelines and get an idea as to how VA determines creditworthiness.
VA’s Prevailing Guideline – What’s Past Is Prologue
“The applicant’s past repayment practices on obligations are the best indicator of his or her willingness to repay future obligations.” VA Pamphlet 26-7, Revised, Chapter 4.
In other words, does the servicemember’s credit record reflect a willingness to pay obligations in a timely manner? If not, is there a reasonable explanation? If the explanation identifies extenuating circumstances, have the circumstances ended, when did the circumstances end, and has there been a series of payments re-establishing the servicemember’s consistent payment history? There is risk assessment, ratios, and verifications, but everything is undergirded by two things: 1) Is there a way to make this work for the veteran; and, 2) Does it make sense?
Minimum Credit Score Requirement
VA does not have a minimum credit score requirement—none. However, VA does not make loans, VA guarantees loans made by private, VA approved lenders. VA lenders may be more conservative than VA, but not more liberal. As such, VA lenders can place restrictions on their version of the guidelines (called overlays) in accordance with their own tolerance for risk and to assure marketability. As a result, most if not all VA lenders have a credit score requirement of at least 580. Sidwell Mortgage can originate VA mortgages with a single credit score as low as 580 – on a case-by-case basis.
Minimum Credit History
VA does not have a minimum credit history requirement. The absence of a credit history is typically not considered as a negative factor. If the servicemember has no credit history, a credit decision can be made based on the servicemember’s payment record on utilities, rent, auto insurance or other alternate credit references.
Bankruptcy
The presence of a bankruptcy on the servicemember’s credit profile does not in itself disqualify the loan. The circumstances of the bankruptcy are considered. Generally speaking, when the servicemember has filed a Chapter 7 bankruptcy, VA requires a 2 year wait period from the date of the discharge, after which the bankruptcy is disregarded. In the presence of a Chapter 13 filing, the wait period for some servicemembers may be as short as 12 months from the filing date.
In both cases satisfactory credit (i.e. no late payments) should exist between the date of the discharge and applying for the VA loan. Please note that other restrictions may apply.
Consumer Credit Counseling
If the servicemember has negative credit entries and is enrolled in a Consumer Credit Counseling Plan, they are deemed an acceptable credit risk after making 12 consecutive on time payments and getting permission from the counseling agency to take on new debt.
If the sevicemember has no negative credit entries and is enrolled in a Consumer Credit Counseling Plan, it is considered a neutral factor, perhaps even positive.
Prior Foreclosures
VA loans permit servicemembers to obtain VA financing two years following a foreclosure.
Deed In Lieu of Foreclosure
VA loans permit servicemembers to obtain VA financing two years following a Deed in Lieu of Foreclosure.
Note: These are general guidelines and there’s an exception to every rule. Make no assumptions. If you have a question that’s not addressed here or need additional clarification please contact us for a free no obligation consultation. We can be reached at 844.SID.WELL (844.743.9355). Feel free to also email us or send a message via the website.
Until the next post … may health and happiness abound.
