Obtaining a VA Home Loan with Poor Credit Ratings
The US Department of Veteran Affairs (VA) has been running the VA Home Loan program for almost 75 years. This program is designed to offer veterans the chance to obtain home loans on better terms and at lower interest rates than those that are available as part of conventional loan packages. If you want to take out a VA loan, the home you want to buy must be your primary residence. You also have to demonstrate that you’re earning enough to pay the monthly installments on your loan. However, some veterans or serving personnel may wish to obtain a VA home loan even if they have a poor credit history, or even no credit history.
Can You Obtain A VA Home Loan With Poor Credit?
Contrary to common perception, VA home loans can still be awarded to those with a poor credit record, provided they can satisfy certain standards set by the government. In summary, you can still obtain a VA loan if you can demonstrate:
- A steady income
- You do not have any debt collections or judgments outstanding against you
- You have made all your payments you owe on time over the last 12 months
- You have a credit score of 620+
Most loan companies who work with the VA will lower their credit score requirements for veterans. Normally a credit score of 740+ is required, and lenders are often willing to lower these requirements for veterans. It must be remembered that the minimum requirements are not mandated by the VA but by the lenders, but as the government guarantees VA loans, lenders are often prepared to accept a higher level of risk.
The VA home loan was developed in recognition of the fact that recently discharged servicemen and women will often be unable to get together a down payment for a property. Many elements could mean a serviceman or woman, or their spouse, hasn’t obtained a credit rating as high as it could be. Many servicemen and women sign up as soon as they leave high school or higher education. This means they won’t have developed a credit rating via student loans, car financing, or credit cards in the same way a civilian could have. Some may find themselves unable to keep up payments on loans when deployed, or may have acquired high levels of debt elsewhere. Luckily, those lenders who work with the VA recognize, and are sympathetic to, these problems. The vast majority of lenders are prepared to try to help veterans with poor credit obtain a VA home loan. Even if you’re in Chapter 13 bankruptcy, as long as you are undergoing credit counseling, you may still be eligible for a VA home loan
If I Have a Poor Credit Score, Will the Amount I Can Borrow Be Affected?
The VA does not have a standard level of debt above or below which you can’t obtain a loan. The total amount you can borrow is not affected by your credit score. For 2017, in most areas of the USA, veterans can obtain loans for up to $424,100 ($636,150 in the 238 American neighborhood rated “high cost”). If you are eligible for a VA home loan, even if you have poor credit, the amount you can borrow is only limited by the area in which you wish to buy a property.
VA loans don’t need down payments, whatever your credit rating, unless the VA decides that the price of the property is significantly greater than its “reasonable value.” When you take out a VA loan, you also won’t have to pay the mortgage insurance that is generally required for other types of mortgage. Additionally, the funds that are usually payable to obtain a mortgage will be waived for veterans with disabilities.
How Will My VA Loan Be Determined If I Have Poor Credit?
The VA acknowledges that veterans who have just left service may not have been able to build up a credit score, and may not have found it necessary to use credit while on service. If you’ve previously been declared bankrupt, you can still obtain a VA loan provided you can show that you are now paying your bills and rent on time, and/or you are taking the steps required to improve your credit.
The VA guidance to those who underwrite mortgages reads: “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 than isolated occurrences of unsatisfactory payment.” The VA asks lenders to look at an applicant’s “entire loan profile” rather than just their credit score. As part of its guidance, the VA also encourages lenders to assess whether those with poor credit records will be able to make their monthly payments and still have enough left over to maintain a reasonable standard of living. This comes into the VA “residual income requirement”; i.e., the minimum amount of money a veteran will need to have left each month after they have met all their obligations in terms of bills and credit. This requirement varies from state to state and is influenced by the size of the veteran’s family. The VA will rate you as satisfactory in terms of credit if you can demonstrate that it is more than a year since you last had a negative credit event. You should be prepared to present proof of payment for your property rent and utility bills. Don’t forget that mortgage companies offer different terms; as such, you should be willing to shop around to obtain the best deal.
How to Repair a Bad Credit Score Prior to VA Home Loan Application
Sometimes, it’s best to try to raise your credit score prior to making your VA home loan application. You should start by examining your current credit score and your credit history. You can often get rid of bad credit by replacing it with a new, positive credit history. You must make sure that the credit history you have is a true one, and keep an eye on your credit score to check that your attempts to improve it are working.
Some things that you can do to improve your credit score are as follows:
Make sure that your credit history is correct
It’s certainly not unknown for Experian, Equifax, and TransUnion, the three main credit bureaus, to make mistakes regarding consumers’ credit, and these may not be rectified even if you inform them. Make sure that credit problems that were sorted out years ago aren’t still showing on your current credit report. Sometimes, collections may still be on your history, even though the statute of limitations expired long ago. Check that there are no unexplained charges or payments registered as late that you don’t think should be there. Also check that your credit history takes all of your accounts into consideration, not just the ones on which there have been problems.
Each of the credit bureaus holds its own records; as such, if you think there are mistakes on your account, deal with the bureau that has individually reported them.
Repair Your Credit Score
Although bankruptcy can remain on your record for up to ten years, you can start repairing your credit score right away. Here are some of the steps you can take:
- Make sure that all your credit repayments and bills are paid in a timely fashion
- Make sure that you pay off your debts rather than just moving them around
- If you don’t have revolving credit, obtain one secured credit card and pay down to zero every month
- If you have credit cards you don’t use, keep the accounts open
- Only purchase things on your credit card that you know you can pay off
- Engage in credit counseling
The VA and approved VA lenders are generally quite lenient towards veterans and service personnel; as such, a poor credit rating will not necessarily be a barrier to obtaining a VA home loan. Always remember that, however poor your credit score, there are methods by which you can improve it. Don’t just assume that you are stuck with the credit score you have right now, and make sure you shop around to see what requirements different lenders have for the loans they have available.