Encompassing FICO scores, income, debt and employment, credit plays a huge role in the VA loan process. Fortunately for veterans and active-duty service members, VA loans feature relaxed credit requirements when compared to conventional loan programs.
Wondering what lenders will expect from a VA loan applicant? Take a look at these four questions that will definitely pop up during the credit evaluation.
1. What is your credit score?
Can you answer: “My credit score is well above 620”? Then proceed to Question 2.
But if you answer: “My credit score is around 620 or below,” keep reading.
Most VA lenders are looking for a credit score minimum of 620. But there are two important factors to note here:
- The credit score a consumer sees is often different from the credit score a lender sees. Lenders use a unique scoring formula that weights your score for mortgage-related factors.
- Most lenders require credit scores from at least two different agencies. And those scores can differ. If two scores are used, lenders will typically rely on the lower of the two scores as your official score. If three scores are used, the middle score is used.
So it’s possible for a borrower to see a FICO score of 625 and assume all is well. Only upon applying for a loan does a borrower learn that the lender views a borrower’s score as 610.
The best way to know if your credit score meets a lender’s criteria is to simply ask. Through prequalification or preapproval (neither of which are binding), a service member can determine if credit scores are satisfactory or in need of work.
2. Do you have old collection/judgment items?
If you can answer “no” to this question, then proceed to Question 3.
If you have items in collection or judgments on your credit report, check out this guideline issued by the VA:
“…if an applicant has numerous unpaid collections…it’s not unreasonable to question the borrower’s ability and willingness to honor obligations.” – VA Lender’s Handbook
You can’t argue with that logic. Lenders want to know that applicants honor their financial debts.
The VA gives lenders leeway in how they handle an applicant with “derogatory debt” (such as collections, judgments and liens). Most lenders place a cap on the amount of derogatory debt an applicant can have. Debt above that cap will be carefully analyzed by underwriters, and could trigger loan denial.
Also keep in mind that if you’re delinquent or in default on any debt to the federal government, your VA loan application is certain to be denied. An applicant can have federal debt (student loans, for example) and qualify for a VA loan, but only if the account is current and in good standing.
The best way to handle collections? Set up a manageable payment plan. Lenders would much rather see an applicant managing their debt than ignoring their debt.
3. Is there a foreclosure/bankruptcy in your past?
No foreclosure or bankruptcy in your recent history? Then hop, skip and/or jump to Question 4.
If you’ve been through a recent foreclosure or bankruptcy, a VA lender will likely enforce the following waiting periods before considering your VA loan application:
- Chapter 7 bankruptcy: 24-36 months from the discharge date (depending on overall credit strength)
- Chapter 13 bankruptcy: 12-36 months from filed date (depending on overall credit strength)
- Foreclosure/short sale: 24-36 months from completion date (depending on overall credit strength)
Keep in mind that the “limbo period” is usually much shorter with a VA loan than other loan options. And don’t forget that you’ll have to do more than endure the waiting period. You’ll also need to show excellent credit habits since the bankruptcy or foreclosure and maintain steady income.
4. Is your income sufficient and stable?
Have you been at the same company for years? Is your income steady and sufficient to maintain a mortgage? Then you’re in excellent shape for VA loan approval.
But if you have an erratic employment record or a widely varied income, you might have a rough road ahead of you. A VA lender wants to know that you’ll be able to consistently pay your mortgage. An unstable income or patchy employment history could easily send the wrong message to a lender: You’re not ready for a mortgage.
To put it simply, you have to make enough money to cover the basic costs of living PLUS a mortgage. And when it comes to employment, the longer you’ve been employed, the better. Retired and disabled veterans are exempt from the employment criteria, but still need to earn enough household income (for example, through a spouse’s income, disability earnings or pensions) to manage a mortgage.
Want to talk over your options? Have a question about your VA loan eligibility? Feel free to post your questions below, and remember: You can always reach a Veterans United VA loan specialist at 855-524-7279.
Photo courtesy of Ano Lobb. @Healthyrx