VA Loans Scenario: Credit Problems

VA Loans Scenario: Credit Issues

VA Loans Scenario: Credit Problems Credit problems happen. Sometimes things just get out of hand and you fall behind, but you shouldn't let that affect your whole future. Especially if you're a Veteran. VA loans have a lot of forgiveness built in ...

VA Loans Scenario: Credit Problems

Credit problems happen. Sometimes things just get out of hand and you fall behind, but you shouldn’t let that affect your whole future. Especially if you’re a Veteran. VA loans have a lot of forgiveness built in by the government, and this video goes into specific detail about that.

This video is meant as an educational resource to prepare borrowers for the loan process.

Credit Benchmarks
The first issue is tackling nebulous phrases like “shaky” or “less than perfect.” We use that kind of language because it can be so tough to discern what constitutes “good” credit, or at least a credit score that can get prospective buyers closer to the dream of home ownership.

The reality is there isn’t one credit score. Lenders will look at a range of scores — weighted a bit differently for the mortgage industry — from the different credit reporting agencies and generally focus on the middle ground.

The VA doesn’t have a credit score requirement. Instead, the agency simply requires prospective borrowers to be considered a “satisfactory credit risk.” It defines the phrase a bit but it’s still rather wide open.

But it’s also not the VA lending you money. The agency basically insures a portion of the mortgage. It’s VA-approved lenders who are on the hook for the bulk in the event of default. They want to insulate themselves from risk as much as possible, and one way they do so is by requiring borrowers to hit a specific credit benchmark.

In today’s lending climate, most VA lenders require a score of at least 620. If your spouse will be obligated on the loan, he or she will need to hit the same benchmark.

The average FICO score for VA borrowers is 709, compared to 750 to 770 scores for conventional loans backed by Fannie Mae and Freddie Mac, respectively

You can certainly have blemishes on your credit report and maintain at least a 620 score. You can even have a history of bankruptcy or foreclosure and still obtain a VA loan.

But right now, in most cases, you’re going to need a credit score of at least 620 in order to secure financing. If you need help boosting your score, check out our Lighthouse Program, a unique arm of Veterans United that works with service members to overcome financial challenges and get on the path to loan prequalification.

Is there a foreclosure/bankruptcy in your past?
No foreclosure or bankruptcy in your recent history? Then go to next question.

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.

Is your income sufficient and stable?
Sufficient Income for VA Loan Application

Income needs to be sufficient to handle the weight of a VA mortgage.
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.

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