The Reality of Bad Credit and VA Loans

Post date: May 11, 2011 2:07:31 AM

There is no minimum credit score requirement in the VA qualifying guidelines, yet VA lenders have the flexibility to decline a home loan due to a low score or other credit factors. Therefore, it is imperative that potential borrowers understand the reality of bad credit and educate themselves on ways to improve their credit for future homeownership.

...when a potential VA borrower has bad credit or even a bankruptcy in his or her history it can sometimes prevent qualification...

It’s true, qualifying standards for VA loans are slightly more relaxed than those of conventional and other types of loan programs. But, when a potential VA borrower has bad credit or even a bankruptcy in his or her history it can sometimes prevent qualification for a VA home loan.

The VA recommends that lenders consider a combination of qualifying requirements when approving VA mortgages. Debt-to-income ratios, residual incomes and loan histories, as well as complete credit histories and FICO scores are usually weighed before approving or declining someone for a VA loan.

Even though the VA does not publish a minimum credit score in its lender guidelines, individual VA-approved lenders may have their own additional credit score requirements. Veterans Affairs gives VA-approved lenders the flexibility to determine whether a VA-eligible borrower is or is not a satisfactory credit risk.

When a VA borrower’s current credit situation is preventing the approval of a VA home loan, then the VA home loan professional can offer a few suggestions, based on experience, that may help the borrower turn bad credit around. It is possible that some borrowers who are willing to repair their damaged credit scores after being declined for VA underwriting may eventually qualify for a VA mortgage.

If the borrower’s bad credit is the result of a bankruptcy, this can also affect the ability to get a VA loan. A potential VA borrower with Chapter 7 bankruptcy may be able to qualify for a VA loan in as little as two years after the discharge date of the bankruptcy. And, a potential VA borrower who has filed for and obtained relief under Chapter 13, and is still paying off the debt according to the approved Plan, may not have to wait as long as someone in Chapter 7 might to be considered for a VA home loan as long as he or she has made 12 months of consistent court-verified payments. Additionally, the court trustee must give written permission to proceed with a loan.

Applicants from VA borrowers with bad credit or bankruptcy histories are considered for VA-backed loans on a case-by-case basis.

Military members who want to know more about qualifying for VA home loans should contact a VA-approved specialty lender.