VA home loans for U.S. military veterans and active military in general tend to be very understanding about credit. The VA loan underwriters are looking for borrowers who do not have a disregard for their credit, but they can be understanding if you have had past credit difficulties and/or have an explanation for your credit circumstances due to situations out of your control. Below I will give an overview of how VA loan underwriters looks at a VA borrowers credit.
First of all, you can still get a VA loan with a credit score of 580 and possible below. It is one of the few home loan choices that is still flexible with credit scores. A guiding principle with VA is that a borrower have 12 mos without any late payments since their last major derogatory, although there can be exceptions with this as well. Below I will go over VA’s policies towards the most common derogatory items found on credit reports:
Collections
These are outstanding accounts on credit reports the creditor is still trying to collect from the borrower on. Collections don’t necessarily have to be paid before getting a loan, especially if medical collections. But if a VA borrower has an exceedingly large amount of collections or some very large collections, it is up to the individual underwriter whether they deem this necessary to decline the loan.
Judgements
These are items of public record owed by the borrower. They can be from unpaid taxes or any unpaid item that a court had ordered you to pay. These items must be paid in order to get a VA loan. However, if you can document that you have set up a payment plan to pay off the judgement, VA may still approve a home loan for you.
Bankruptcy
If you have had a Chapter 7 bankruptcy that has been discharged for 2 or more years VA will approve your loan. However you will still have to write a letter of explanation detailing the circumstances of the bankruptcy and you will likely need to have no late payments since the bankruptcy and have re-established credit. If it has been less than 2 years since your bankruptcy 7, VA will only approve your loan if you can document circumstances out of your control that led to the bankruptcy. With a Chapter 13 bankruptcy VA will approve your loan 12 mos after the bankruptcy as long as all the Chapter 13 payments have been made on time.
Foreclosure
VA will approve a loan 2 years after the final date of a foreclosure
Credit card and installment late payments
Generally if it has been more than 12 months since your last credit card or installment late payment VA will be OK with that as long as your credit score meets minimum guidelines and you have an explanation. If you have late payments within the last 12 months, the VA underwriter is going to want to see a very good letter of explanation and it will be up to the underwriters discretion whether to approve the loan. They will be looking at the big picture to see if this is an isolated occurrence or if there is a general disregard for credit by the VA loan applicant.
Spouses credit
If a VA borrowers spouse will be a co-borrower on the loan, their credit will be reviewed to the same extent as the VA borrower. Each borrower has 3 credit scores, with 2 borrowers VA will take the lowest of the middle scores. So if a spouse has a poor credit score, it may be wise to leave them off the loan. However an important point, in a community property state like California and many other states, even if the spouse is left off the loan, their debt obligations will be have to be considered in the qualifying ratios. So even if a spouse is left off the loan, their car payments, student loan payments, credit card payments, etc… will have to be considered. However if they are not on the loan, their credit score and quality of their credit will not be a factor in the VA borrower qualifying for a loan.
So those are some major credit items and brief explanations to how VA underwriters regard them. And below are the most common practices to make sure your credit is the best it can be:
- Make sure you NEVER are late on any debt obligations
- Keep your credit card balances to 30% or less than the card limit
- Review your credit every 6 mos to make sure their are no mistakes or errors. If there are errors, take action to get them removed.
I hope this article has been helpful. VA loans with 100% financing, low 30 year fixed interest rates and no monthly mortgage insurance offer a tremendous opportunity for veterans and active military members to purchase a home. Feel free to call or email me with questions or to get a quick pre-approval for a VA loan.
Warm Regards,
Rob Chomentowski
Sr. Loan Officer (and VA loan specialist)
858-922-7899
