Credit guidelines on a VA mortgage is more than a review of credit history. Unlike a conventional mortgage, VA loan requirements put more emphasis on Residual Income (balance available for family support after debts) than Debt to Income Ratios. This page should shed some light on credit history and how it impacts your DTI and/or Residual Income.
VA will analyze a borrower’s past credit performance in determining the loan for approval. A borrower who has made timely payments for the last 12 months serves as a guide and demonstrates their willingness to repay future credit obligations. On the opposite side, a borrower who reflects continuous slow payments, judgments and delinquent accounts is not a good candidate for loan approval.
Below is a list of items concerning the borrower’s credit:
The applicant’s past repayment practices on obligations are the best indicator of his or her willingness to repay future obligations. Emphasis should be on the applicant’s overall payment patterns rather that isolated occurrences of unsatisfactory repayment.
Determine whether the applicant (and spouse, if applicable) is a satisfactory credit risk based on a careful analysis of the credit report and other credit data.
A poor credit history alone is a basis for disapproving a loan. If credit history is marginal, look to other indicators such as residual income.
Rent and Mortgage Payment History
The applicants rental history and any outstanding, assumed, or recently retired mortgages must be verified and rated. Housing expense payment history is often the best indicator of how motivated the applicant is to make timely mortgage payments in the future.
Rental Payment History
For credit scores below a 620, you will need to provide a 12 month rental history directly from landlord, through information shown on credit report or by cancelled checks.
Mortgage Payment History
Obtain direct verification when ratings are not available on mortgages that are outstanding, assumed, or recently retired.
A written explanation of mortgage payment history is required for borrowers with more than 1×30 day late payment for all mortgages for the past 12 months.
Late Mortgage Payments
In circumstances not involving bankruptcy, satisfactory credit is generally considered to be reestablished after the veteran, or veteran and spouse, have made satisfactory payments for 12 months after the date of the last derogatory credit item(s).
When the underwriter analyzes the borrowers credit; it is the overall pattern of credit behavior that must be reviewed, rather than isolated cases of slow payments. A period of financial difficulty does not disqualify the borrower if a good payment pattern has been maintained since then.
Account balances reduced to judgment by a court must either be paid in full or subject to a repayment plan with a history of timely payments.
No Credit History
In the area of credit, the lack of an established credit history should not be a deterrent to loan approval. As provided in the credit standards, a satisfactory payment history on items such as rent, utilities, phone bills, etc., may be used to establish a satisfactory credit history.
If a mortgage or other significant debt is listed on the credit report as past due and was last updated >90 days, verify current status of past due debt.
Derogatory Credit Information:
Obtain explanation for derogatory credit. Explain assessment of creditworthiness on VA Form 26-6393, Loan Analysis.
Alimony &/or child support payments:
Provide proof of deposits on bank statements for three months and … front page and details of support payments from the divorce decree, indicating evidence of at least three years continuance.
“CAIVRS” is a “Credit Alert Interactive Voice Response System”. Basically what it does is check the applicant for Government obligations that are in default. I don’t think the system supports “voice” anymore so the acronym may change in the future.
Perform a CAIVRS screening on each applicant and any co-obligor immediately upon receipt of a loan application. This includes IRRRL applicants.
Applicant Presently Delinquent
Give full consideration to the CAIVRS information, and any subsequent clarifying information provided when applying VA credit standards.
- Consider the terms of any repayment plan in analyzing monthly debt payments.
- Consider any delinquencies in determining credit worthiness.
CAIVRS information is only for the lender’s and applicant’s use in process the loan application. Only those persons having responsibility for screening applicants and/or co-obligors may use CAIVRS.
If the CAIVRS screening indicates an applicant (or co-obligor) is presently delinquent or has had a foreclosure or a claim paid on a loan made, guaranteed or insured by a Federal agency, refer to VA for actions.
If the property is located in a community property state, VA requires consideration of the spouses credit (whether or not the spouse will be personally liable on the note and whether or not the applicant and spouse choose to have the spouses income considered).
If a married veteran wants to obtain the loan in his or her name only, the veteran may do so without regard to the spouses credit only in a non-community property state.
Accounts in the Spouses Name: Under ECOA, upon the applicants request, the lender must consider any account reported in the name of the applicants spouse or former spouse that the applicant can demonstrate accurately reflects the applicants credit-worthiness.
Credit reports used in analyzing VA loans must be either a Three-file Merged Credit Reports (MCR), or a Residential Mortgage Credit Reports (RMCR). If an RMCR is used the standards applicable to an RMCR include, but are not limited to, the following:
- The report must be prepared by a reputable credit-reporting agency.
- Each account with a balance must have been checked with the creditor within 90 days of the date of the credit report.
- For each debt listed, the report must provide the creditors name, date the account was opened, high credit, current status, required payment, unpaid balance, and payment history.
- The report must name at least two national repositories of credit records contacted for each location in which the borrower has resided during the most recent two years.
- Separate repository inquiries are required for any co-borrowers with individual credit records.
- The report must include all available public records information that is not considered obsolete under the Fair Credit Reporting Act; such as bankruptcies, judgments, lawsuits, foreclosures and tax liens.
- The RMCR must be an original report, with no erasures, white-outs, or alterations.
- The report must contain a 24 month employment and residency history.
- All inquiries made within the last 90 days must be included on the report.
VA may decline to accept a credit report which does not meet these standards.
Age of Reports: Credit reports and verifications must be no more than 120 days old (180 days for new construction). For automatically closed loans, this means the date of the credit report or verification is within 120 days of the date the note is signed (180 days for new construction). For prior approval loans, this means the date of the credit report or verification is within 120 days of the date the application is received by VA (180 days for new construction).
Obligations not included on the credit report, which are revealed on the application or through other means, the lender must obtain a verification of deposit showing the obligation or other written verification directly from the creditor. The lender must also separately verify accounts listed as “will rate by mail only” or “need written authorization”.
When a pay stub or leave-and-earnings statement indicates an allotment, the lender must investigate the nature of the allotment to determine whether the allotment is related to a debt.
For obligations that have not been rated on the credit report or elsewhere, obtain the verification and rating directly from the creditor. Include a written explanation for any obligation that is not rated.
Resolve all discrepancies: If the credit report or deposit verification reveals significant debts or obligations, which were not divulged by the applicant; Obtain clarification as to the status of such debts from the applicant. Then verify any remaining discrepancies with the creditor.
The fact that a bankruptcy exists in an applicants (or spouses) credit history does not in itself disqualify the loan. Develop complete information on the facts and circumstances of the bankruptcy. Consider the reasons for the bankruptcy and the type of bankruptcy filing.
The VA guidelines state that a minimum of two (2) years must elapse since the discharge date of the borrower and / or spouse’s Chapter 7 bankruptcy, not the filing date. A full explanation of the bankruptcy will be required. The borrower must also have re-established good credit, qualify financially and have good job stability.
You may disregard a bankruptcy discharged more than two years ago. However, if the bankruptcy was discharged within the last one to two years, it is probably not possible to determine that the applicant or spouse is a satisfactory credit risk unless both of the following requirements are met:
- The applicant or spouse has obtained consumer items on credit subsequent to the bankruptcy and has satisfactorily made the payments over a continued period, and
- The bankruptcy was caused by circumstances beyond the control of the applicant or spouse such as unemployment, prolonged strikes, medical bills not covered by insurance, and so on, and the circumstances are verified.
Divorce is not generally viewed as beyond the control of the borrower and/or spouse.
If the bankruptcy was caused by failure of the business of a self-employed applicant, it may be possible to determine that the applicant is a satisfactory credit risk if:
- The applicant obtained a permanent position after the business failed.
- There is no derogatory credit information prior to self-employment.
- There is no derogatory credit information subsequent to the bankruptcy, and
- Failure of the business was not due to the applicants misconduct.
If a borrower or spouse has been discharged in bankruptcy within the past 12 months, it will not generally be possible to determine that the borrower or spouse is a satisfactory credit risk.
Chapter 13 Bankruptcy
A chapter 13 BK filing indicates an effort to pay creditors back in a repayment plan.
The VA guidelines state that they will consider a borrower still paying on a Chapter 13 Bankruptcy if the payments to the court have been satisfactorily made and verified for a period of one year (with no missed payments). In addition, the court trustee will need to give written approval to proceed.
A full letter of explanation of the bankruptcy will be required. The borrower must also have re-established good credit with a minimum credit score of a 620 Middle Fico Score and need to qualify financially and have good job stability.
The fact that a home loan foreclosure (or deed-in-lieu of foreclosure) exists in an applicants (or spouses) credit history does not in itself disqualify the loan.
The waiting period for a borrower whose previous residence or other property was foreclosed on or given a deed-in-lieu of foreclosure is two (2) years since the disposition date for a VA insured mortgage.
Note: If the foreclosure was on a VA loan, the applicant may not have full entitlement available for the new loan.
Develop complete information on the facts and circumstances of the foreclosure. Apply the guidelines provided for bankruptcies filed under the straight liquidation and discharge provisions of the bankruptcy law.
If the foreclosure was on a VA loan, the applicant may not have full entitlement available for the new loan. Ensure that the applicants Certificate of Eligibility reflects sufficient entitlement to meet any secondary marketing requirements of the lender.
Judgements and Federal Debts, Collection, Tax liens and Adverse credit
The VA guidelines state that if a collection is minor in nature, it usually does not need to be paid off as a condition for loan approval. Judgments must be paid in full prior to closing. A borrower is not eligible for the loan if they are delinquent on any federal debt. This can include tax liens, student loans, etc. Payment arrangements that would bring the borrower up to date may be considered for loan approval.
In circumstances not involving bankruptcy, satisfactory credit is generally considered to be reestablished after the veteran, or veteran and spouse, have made satisfactory payments for 12 months after the date of the last derogatory credit item.
If the applicant and/or spouse are determined satisfactory credit risks in spite of derogatory credit information, include an explanation of the basis for the determination.
For unpaid debts or debts that have not been paid timely, pay-off of these debts after the acceptability of applicants credit is questioned does not alter the unsatisfactory record of payment.
Lenders may consider a veterans claim of bona fide or legal defenses regarding unpaid debts except when the debt has been reduced to judgment.
Collection accounts do not necessarily have to be paid off as a condition for loan approval.
Account balances reduced to judgment by a court must either be paid in full or subject to a repayment plan with a history of timely payments.
Other Debts and Obligations
Job Related Expense: Include any costs for child care, significant commuting costs, and any other direct or incidental costs associated with the applicant’s (or spouse’s) employment.
Deferred Student Loan Payments: If student loan repayments are scheduled to begin within 12 months of the date of VA loan closing, lenders should consider the anticipated monthly obligation in the loan analysis. If the borrower is able to provide evidence that the debt may be deferred for a period outside that timeframe, the debt need not be considered in the analysis.
Loans Secured By Deposited Funds
Certain types of loans secured against deposited funds (signature loans, cash value life insurance policies, 401K loans, etc.) in which repayment may be obtained through extinguishing the asset, do not require repayment consideration for loan qualification.
Note: Assets securing these loans may not be included as an asset in the loan analysis.
Consumer Credit Counseling Plan
If a veteran, or veteran and spouse, have prior adverse credit and are participating in a Consumer Credit Counseling Plan, they may be determined to be a satisfactory credit risk if they demonstrate 12 months’ satisfactory payments and the counseling agency approves the new credit.
Lenders do not treat this as a negative credit item if the veteran entered the Consumer Credit Counseling plan before reaching the point of having bad credit.
No Credit History / Alternative credit
For obligations that have not been rated on the credit report or elsewhere, obtain the verification and rating directly from the creditor.
Absence of a credit history is not generally considered an adverse factor.
For applicants with no established credit history, base the determination on the applicants payment records on the following types of items:
- Utilities (electric bill, gas bill, phone bill)
- Rent payment History
- Automobile insurance,
- other expenses that applicant has paid.
Deducting debts from income
Deduct significant debts and obligations from total effective income when determining ability to meet the mortgage payments. Significant debts and obligations include:
- Debts and obligations with a remaining term of 10 months or more; that is, long-term obligations, and Accounts with a term less than 10 months that require payments so large as to cause a severe impact on the family’s resources for any period of time. Example: Monthly payments of $300 on an auto loan with a remaining balance of $1,500, even though it should be paid out in five months, would be considered significant. The payment amount is so large as to cause a severe impact on the family’s resources during the first, most critical, months of the home loan.
Determine whether debts and obligations, which do not fit the description of “significant”, should be given any weight in the analysis. They may or may not have an impact on the applicants ability to provide for family living expense.
Applicant as Co-obligor on Another’s Loan The applicant may have a contingent liability based on co-signing a loan. If there is evidence that the loan payments are being made by someone else, and there is no reason to believe that the applicant will have to participate in repayment of the loan, then the lender may exclude the loan payments from the monthly obligations factored into the net effective income calculation in the loan analysis.
Pending Sale of Real Estate
In some cases, the determination that the income and/or assets of a veteran are sufficient to qualify for the loan depends upon the consummation of the sale of presently owned real property. Sales proceeds may be necessary to:
- Clear the outstanding mortgage (s) against the property.
- Pay off outstanding consumer obligations, and/or
- Make a down payment or pay closing costs on the VA loan.
Alternatively, the veteran may intend to sell the property with the buyer assuming the outstanding mortgage obligation. The lender may disregard the payments on the outstanding mortgage and any consumer obligations, which the veteran intends to clear if available information provides a reasonable basis for concluding the equity to be realized from the sale will be sufficient for this purpose.
Secondary borrowing is acceptable as long as the veteran must not be placed in a substantially worse position than if the entire amount borrowed had been guaranteed by VA. and the requirements detailed below are met.
The lender must submit documentation disclosing the source, amount, and repayment terms of the second mortgage and agreement to such terms by the veteran and any co-obligors.
The second mortgage must be subordinated to the VA guaranteed loan, that is, the second mortgage must be in a junior lien position relative to the VA loan.
Proceeds of the second mortgage may be used for a variety of purposes, including but not limited to closing costs, or a down payment to meet secondary market requirements of the lender.
They may not be used to cover any portion of a down payment required by VA to cover the excess of the purchase price over VA’s reasonable value.
There can be no cash back to the veteran from the VA first mortgage or second mortgage obtained simultaneously.
The veteran must qualify for the second mortgage which is underwritten as an additional recurring monthly obligation.
The rate on the second mortgage may exceed the rate on the VA-guaranteed first, however, it may not exceed industry standards for second mortgages. “Rule of thumb” is that second mortgages are one or two percent above the market interest rates for first mortgages.
Debts Owed to the Federal Government
An applicant cannot be considered a satisfactory credit risk if he or she is presently delinquent or in default on any debt to the Federal Government until the delinquent account has been brought current or satisfactory arrangements have been made between the applicant and the Federal agency. The refinancing of a delinquent VA loan with an IRRRL satisfies this requirement. An applicant cannot be considered a satisfactory credit risk if he or she has a judgment lien against his or her property for a debt owed to the Government until the judgment is paid or otherwise satisfied.
Debt Related to VA Benefits
Before processing a loan involving certain veterans, the lender must submit VA Form 26-8937, Verification of VA Benefit-Related Indebtedness, to the VA office where the loan application and/or closed loan package will be sent. VA will complete and return the form to the lender.
The loan cannot be submitted for prior approval or approved under the automatic procedure until the lender obtains the completed form from VA. The lender must submit the completed form with the loan package.
If the form indicates that the applicant receives non-service-connected pension or has been rated incompetent by VA, the loan cannot be closed automatically.
Submit the loan for prior approval.
If the form indicates that the applicant has any of the following:
- An outstanding indebtedness of overpaid education, compensation or pension benefits.
- An education or direct home loan in default.
- An outstanding indebtedness resulting from payment of a claim on a prior guaranteed home loan.
- A repayment plan for any of these debts that is not current,
then: one of the following must accompany the loan package: evidence of payment in full of the debt, or evidence of a current repayment plan acceptable to VA and evidence that the veteran executed a promissory note for the entire debt balance.
VA may find a repayment plan acceptable if the veteran has been satisfactorily making payments on a repayment plan in effect prior to the lenders inquiry.
The veterans overall credit history and anticipated financial capacity after the proposed loan is made indicate a reasonable likelihood that the repayment plan will be honored and the outstanding amount of indebtedness is not so large that it would prevent payment in full within a reasonable period (approximately one year), or
The case involves unusually meritorious circumstances. Example: Consideration would be given to a veteran with an outstanding credit history and adequate income whose debt balance is too large to be reasonably paid out in less than 18 months to two years.
VA will offer special consideration to a veterans claim that he or she was not previously aware of an overpayment of benefits
Note: No promissory note is required in cases referred to the Department of Justice, General Accounting Office, or VA Regional Counsel for judicial enforcement. In such cases, VA will obtain information on the applicants debt status from these parties and relay pertinent information to the lender.