VA Loans and Bad Credit Hot Topics

VA Home Loans

Written by Isaac F. Davis

The most frequently asked questions about VA loans for those with bad credit and bankruptcies can be answered right here.  There is no question that the qualifying standards for VA loans are slightly more relaxed than those of conventional and other types of loan programs.  But, what if a potential VA borrower has bad credit or even a bankruptcy in his or her history?  Is a VA home loan, then, completely out of reach?  And, who makes the ultimate decision on whether a veteran with poor or bad credit or Chapter 7 or 13 bankruptcy history qualifies for a VA loan?  Is it the VA-approved lender or the VA itself that decides?

Tackling the first question, on poor or bad credit, can help VA borrowers understand how the VA Home Loan Guaranty Program works for active duty military members and veterans with compromised financial histories.  Occasionally, a military member who is eligible for a VA mortgage, as outlined by the U.S. Department of Veterans Affairs home loan benefits eligibility guidelines, applies for a VA loan and is told he or she has bad or poor credit. 

Bad credit is not necessarily a deal breaker in qualifying for a VA home loan. There are many factors that go into VA mortgage underwriting.  The VA recommends that lenders consider a combination of things when approving VA mortgages.  Debt-to-income ratios, residual incomes and loan histories, as well as complete credit histories and FICO scores are all evaluated before approving or turning down anyone for a VA loan.  VA borrowers should never assume that bad credit histories automatically mean they don’t qualify for VA loans.

VA home loans are originated and funded by VA-approved mortgage companies, with a portion of each loan backed by the federal government. The VA does not publish a minimum credit score in its lender guidelines.  The VA simply provides a recommendation to lenders that it will provide its guaranty only on veterans’ loans that are made to VA-eligible borrowers who are a satisfactory credit risk. 

When a VA borrower is being considered for underwriting, and it turns out his or her current credit situation is preventing the approval of a VA home loan, then an experienced VA mortgage professional can help the borrower understand the problem areas in his or her credit history that need improvement. 

There are also Regional VA Loan Offices that employ qualified mortgage counselors who can advise VA borrowers on how to turn their bad credit around in order to qualify for a VA loan.  Repairing damaged credit scores can help those who are temporarily turned down for VA underwriting to eventually qualify for a VA mortgage.

There are certain strategies for improving credit like paying off a credit card or selling a car and paying off the loan that can both quickly make a noticeable difference in the borrower’s FICO score. 

Just as bad credit is not the end of the VA loan road, neither is a prior bankruptcy.   Though a bankruptcy can affect a borrower’s ability to get a loan, it is not as bad as many VA borrowers might think. The VA has very specific guidelines for VA-approved lenders when considering VA borrowers with prior bankruptcies. 

When a potential VA borrower has a prior Chapter 7 bankruptcy, then he or she may be able to qualify for a VA loan in as little as two years after the discharge date of the bankruptcy.  Of course, the VA-eligible borrower will have to provide the lender with details of the circumstances surrounding the filing of Chapter 7.  Most importantly, in order to begin the qualifying process, the borrower will need to have re-established his or her credit to satisfactory status and must be able to maintain it.  The borrower must also have stable income to demonstrate the ability to pay back the loan. 

Because there is more than one type of bankruptcy, the VA has rules for Chapter 13 filers as well.  A potential VA borrower who has filed Chapter 13, and is still paying off the debt, may not have to wait, like he or she would with a Chapter 7, to be considered for a VA home loan.  The stipulation is that if the VA borrower he or she must currently be making payments to the court.  The payments the borrower is making must show to be consistent for the past year.   It may be necessary for a court trustee to provide a written recommendation for the borrower.  The borrower may also need to explain the circumstances under which the bankruptcy was filed.  And, like Chapter 7 filers, someone in Chapter 13 bankruptcy must also have re-established good credit and have a stable job that shows ample income and the ability to repay the loan. Typically this process takes one year from filing Chapter 13 bankruptcy.

VA borrowers with bad credit or bankruptcy histories should know that when they apply for a VA-backed loan, they are considered by VA-approved underwriters on a case by case basis.  Most lenders use an automated underwriting system that allows them to feed qualifications into a program that can help determine whether a borrower is qualified. But for borrowers with a history of bad credit or bankruptcy, manual underwriting is necessary.  Since no two borrowers’ situations are alike, no two manual underwriting processes will be the same.

Though the VA provides certain guidelines when it comes to approving or denying a VA loan application, many ask whether the decision is up to the Veteran’s Administration or the VA-approved lender.  Ultimately it’s the lender that determines if a borrower is qualified for a VA loan.  Of course, all VA-approved lenders must follow the basic VA guidelines for underwriting veterans’ mortgages.  Additionally, a lender may have its own requirements for qualifying for the VA-guaranteed mortgages it funds.  

Borrowers with bad credit history or bankruptcy who want more information about qualifying for VA home loan should contact a VA-approved lender and ask about pre-qualifying for a VA-backed mortgage.

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