Obtaining a VA Loan With a Poor Credit Record
VA loans have been created with borrowers in mind; as such, it is much easier to obtain a loan of this nature if you have a poor credit record than it is to obtain standard credit. Providing you have a regular income, don’t have any collections hanging over you and/or judgments waiting to be enacted against you, and have a credit score more than 620, you could be eligible for a VA loan.
The VA Home Loan Program began in 1944 as a way of offering gratitude to servicemen and women who had returned home from serving the United States in the Second World War. It guarantees your home loan so that the process of purchasing the property becomes safer, easier, and less expensive.
The program makes things easier by allowing borrowers who have a relatively poor credit record to obtain a mortgage. Overall, the program has been designed to remove many of the usual stumbling blocks that prevent people from obtaining a mortgage; e.g., credit rating requirements, down payments, legal charges, and so on.
Service men and women who have been working outside the USA will often have trouble establishing a good credit rating. Some may not be able to get the money together that they need to make down payments. The government decided that one of the most effective methods to help veterans who have returned home from overseas service would be to assist them to purchase a property.
As the program has developed, it has been modified in several ways. The most important changes have been increases in the size of the loan available and modifications that entail service personnel who are still on active duty can be considered for the loan. Depending on the area in which you plan to settle, you can currently secure a loan with no down payment for between $417,000 and $625,000 plus. If a loan is made via the VA Loan Program, mortgage lenders know that their money is safe and that they can lend to veterans with confidence.
To be eligible for a VA loan, you need to demonstrate your creditworthiness by proving that you have regularly repaid any previous loans and that you have a regular income that will remain sufficiently steady in the future to the extent that you can pay your bills, maintain a minimum standard of living, and make the repayments on your mortgage loan.
You will be regarded as having a stable income if you have been in steady work for at least two years. If you haven’t been, the program will look at how likely you are to enjoy steady work in the future. In the majority of areas, you will also need a FICO credit score of 620 above.
If you do not have a credit score of 620+, or a credit score at all, you may still be eligible for a VA loan. If you have no credit rating, the loan evaluators will examine how well you have managed to stay up-to-date with standard monthly payments such as rental, vehicle insurance, etc. Your creditworthiness will be judged on the basis of several elements. In general, you should not have missed or been late with any payments over the previous twelve months. This does not mean that your application will be automatically rejected if you have been late making payments. If there are good reasons as to why you have experienced trouble making payments, the requirement may be waived. You will not automatically be rejected if you have collection accounts that have not been paid off, provided an agreed schedule of payment has been drawn up. If you are undergoing a Chapter 13 bankruptcy, or are taking part in a Consumer Credit Counselling program, this can count in your favor. The vital element administrators are looking for is that you have a plan in place for making your payments, and that you are adhering to it.
If you have experienced Chapter 7 bankruptcy, this will not necessarily count against you when your application for a loan is being evaluated providing it has been 24 months or more since your bankruptcy was given or discharged. As above, you do not have to have come out of Chapter 13 bankruptcy, providing you are making the agreed repayments to your creditors. Furthermore, the circumstances of your bankruptcy will be taken into account; for example, you will not be penalized if you had to file for bankruptcy due to medical problems. Bankruptcy also won’t be counted against you if it was caused by the collapse of a business you created, providing you have found alternative employment and your credit record is good apart from that particular incident.
Obtaining a VA Home Loan with Bad Credit
We are frequently asked how easy it is to obtain a VA loan with less-than-perfect credit. There isn’t an absolute answer to this, partly because “bad credit” isn’t always clearly defined. As a rule of thumb, you require a FICO credit score of 620+ to obtain a VA loan. However, the VA does not require a standard credit rating. Different lenders have different cut-offs for credit ratings. Some lenders may provide loans to those with a score of less than 620. Generally, providing loans to those with a score of 620+ is regarded as fair credit, and loans to those with a score under 620 is regarded as sub-prime credit, sometimes called “bad” credit. However, these are not hard and fast definitions.
If you want to achieve your dreams of homeownership using a VA home loan, but poor credit is blocking your dreams, the Lighthouse Program from goodtogomortgage may be able to help.
VA Loans: Credit Cut-offs
First, it is important to consider what we mean when we use phrases such as imperfect or bad credit. These terms are not always clearly defined because it’s sometimes difficult to quantify what good credit is, or to pin down the exact credit score that will allow purchasers to obtain the home loan they desire.
In truth, there is no universal credit rating we can point to. Lenders will examine a number of the different ratings that credit reporting agencies have specifically designed for mortgages and take a fair average. More information about how credit ratings are decided is available here.
For the time being, we’ll stick to the essentials: If you want to have a strong chance of having your loan approved, what credit rating do you require?
Current Requirements for VA Loans
There is no hard and fast credit score for a VA loan. The VA just states that you must be a “satisfactory credit risk.” This gives us somewhere to start, but it’s still quite a broad definition.
You must remember that the VA does not actually provide you with a loan. The VA offers insurance so that lenders know that at least part of the money you borrow will be paid back. It’s still lenders who are taking the biggest risk in providing a loan, and they want to mitigate this risk by ensuring that borrowers have a minimum level of credit. At present, this is generally 620+. If your husband or wife is going to be named as part of the loan, they will have to meet this credit score as well.
Standard loans are given to borrowers with an average FICO score of 750 (Fannie Mae) to 770 (Freddie Mac), while the average score for a VA loan is 709.
As such, when you ask if you can still get a VA loan if your credit is imperfect or “shaky,” it’s dependent on the definitions of those terms. It’s certainly the case you can have a less-than-perfect credit history and still have a score of 620+. You can still get a VA loan even if you previously foreclosed on a mortgage or have been declared bankrupt. However, generally, your credit score should be 620+ for you to be eligible to obtain a home loan. If you need to boost your credit score, have a look at our Lighthouse Program, the department of Good to Go Mortgage that is dedicated to helping servicemen and women, and veterans, improve their credit rating and become more likely to prequalify for a loan.
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
Many credit counseling agencies exist. For a low price, or even for free, these will help you to rebuild your credit, pay off your debts, and establish a budget you can afford. A list of debtor education and consumer credit counseling programs can be found at the US Trustee Program.
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.
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Good to Go Mortgage has a long record of helping investors obtain non-owner-occupied investment mortgages on property. Our mortgage loans for investors offer you the greatest loan to value with the lowest interest rates. Whether you want to buy a second property, property to rent, or a home to flip, we can assist you to attain your loan swiftly. We have many different loans available, varying from fixed-rate loans to variable interest rate programs. We also offer the lowest rates. We provide a bespoke service that ensures you can access a loan that is aligned with your needs. Many customers return to us again and again because they know we will offer them a quick and efficient service with the lowest interest rates available.
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