VA Loan Credit Guidelines
Will My Credit and Income Be Good Enough To Get a VA Home Loan?
There are 2 steps to determining if you are eligible for a VA loan and the amount of loan you qualify for.
Step 1 - The first step is to obtain your VA Certificate of Eligibility (COE). A certificate eligibility is based upon your service record, and will be issued if you meet the minimum service requirements.
Step 2 - (Most Important) The second step is to get prequalified with a VA authorized lender to make sure you meet the minimum credit standards necessary to be approved for a VA loan. In general, the VA home loan program is much more forgiving than other loan programs, but you must still meet the VA’s credit and income criteria.
The VA does not have a minimum credit score requirement. You should know that most lenders have imposed their own minimums, although Benchmark Mortgage offers loans for credit scores as low as 580.
It is important to note that credit score is not the only factor involved in determining if a veteran will be approved for a loan. There are many other considerations that will affect a veteran’s ability to obtain a VA loan. A veteran who has prior credit issues is not automatically disqualified for a loan. The VA considers the most recent history to be the most relevant, and will overlook certain past problems if the borrower’s circumstances have improved and they can demonstrate that they are now in a position to meet their current and future obligations.
Here are a few of the most commonly asked questions we are asked about credit history and the VA’s guidelines we are required to adhere to.
Late Mortgage Payments
The VA primarily looks at the last 12 months mortgage history. With a satisfactory history in the previous 12 months, they may overlook prior periods of intermittent late payments due to financial difficulties caused by extenuating circumstances.
No Credit History
A lack of credit history is not uncommon, and should not be used as a reason to deny a loan. It is generally acceptable to use “non-traditional” credit to establish a veteran's pattern of meeting their obligations. Some examples of “non-traditional" credit would be references from utility, phone, cable TV, auto insurance, etc.
Chapter 7 Bankruptcy
The VA requires a minimum of 2 years from the discharge of a chapter 7 bankruptcy to be eligible for a loan. Also, the VA will require an written explanation for the bankruptcy, a good credit history following the bankruptcy, and a stable income and employment history.
Chapter 13 Bankruptcy
This type of bankruptcy is less common. The VA will require a satisfactory payment history documented by the trustee. If you are still in bankruptcy, and have been making payments for at least a year, you may be able to obtain a loan before the bankruptcy is discharged. You will need a letter from the trustee granting you permission to obtain a loan, with the amount of the loan and monthly payments. You will also need to write a letter explaining the circumstances that caused the bankruptcy. The underwriter will review the documentation and approve the loan if they feel it makes sense.
Outstanding judgments must be satisfied prior to obtaining a VA home loan.
Federal Obligations or Tax Liens
Must be paid off prior to closing. If you have a payment plan, you may qualify if you have made at least 12 payments with a history that shows no late payments since the payment plan went into effect
Foreclosure or Short Sale
A foreclosure, deed-in-lieu of foreclosure, or short sale within the previous two years since the disposition date is generally not eligible for a VA insured mortgage. Also, if the foreclosure involved a VA loan, the veteran may not have full entitlement available for future VA loans.
Consumer Credit Counseling
Veterans with prior credit problems that have demonstrated the desire to reestablish by participating in a Consumer Credit Counseling Plan may be eligible with the following conditions. (a) A good credit and payment history 12 months verified by the agency. (b) The agency authorizes the veteran to take on the new debt associated with the new VA Loan.
VA Debt-To-Income Ratio Requirement
As a general rule, the VA allows a debt-to- income ratio up to 41%, however this is a guideline and can be exceeded with compensating factors. To calculate your ratio, add your total housing payment (principal, interest, taxes and insurance) plus all monthly revolving and installment debts, and divide by your monthly household income. It is best to have a VA mortgage specialist review your debt-to-income ratios due to variables that can exist.
Cosigners or Joint Applicants
Spouses - Are eligible to sign with the veteran. Income for the spouse may be counted and any debts that are the spouses liability must be considered. As mentioned previously, the debt ratio may be increased with compensating factors. Some of these compensating factors may include: Stellar credit history, minimal consumer debt, long-term employment, significant assets, and large down payment, etc.
Residual Income - The VA also considers residual income, which is the amount of money remaining at the end of the month after all bills have been paid. If your residual income exceeds the minimum amounts required by the VA, as published in the VA’s residual income charts, the debt-to-income ratio may be increased. Debts that are the spouses liability must be considered.
Two Eligible Veterans - If two eligible Veterans choose to purchase a home together, the entitlement charge would be divided equally between the two and the loan would be fully guaranteed by the VA.
VA Occupancy Requirements
VA loans are for the veterans (or immediate family if the veteran is deployed) primary residence only. A VA loan cannot be used to purchase an investment property or second home. *The veteran must certify prior to and at closing that they will occupy the home within 60 days (or their immediate family if deployed).
*The exception to this rule is the VA Streamline Refinance Loan (IRRL). The veteran need not currently occupy the property when obtaining a rate reduction on a property they previously occupied and still own.
Get Started Today With Your VA Loan Request!
To speak with Chris or one of his team of VA Home Loan specialists about taking the next step toward prequalification, call us at 866-704-2826 or complete our quick-and-easy request form. We'll be happy to contact you and discuss your next steps.
We look forward to assisting you.
By submitting your request, you are not obligating yourself. You are simply asking to be contacted by one of our talented specialists who can answer your questions. Florida Veterans Home Loans works exclusively with military families and we have helped people all across Florida understand the VA loan process.