From Debt Into Retirement

When it comes to qualifying for a VA home loan, bad credit will not necessarily stop you from becoming a homeowner. VA home loan bad credit lending regulations do require that the lender make a sound decision about what type of credit risk a borrower represents, but unlike a conventional home loan, the analysis of that credit risk only starts with your FICO score, it does not end with it.

The manual for VA Mortgage Lenders outlines some very basic guidelines to determining if you are a reasonable credit risk. A VA home loan, bad credit or good, must rely on verifiable income. If the applicant is no longer active duty military, the lender must verify the last two years of stable employment. Verification includes pay stubs, the Human Resources department, filling out the VA Form 26-8497 and a pay stub, or verification through a VA approved service such as TALX Corporation’s “The Work Number for Everyone”. While the lender may make exceptions to the two-year rule, they generally will not for a bad credit mortgage.

A borrower’s cash on hand can make the difference on a bad credit VA home loan. The VA requires the borrower to pay the closing costs, as a minimum. If a borrower has bad credit, showing cash on for a number of payments can help a lender justify the borrower as a reasonable credit risk. To prove these liquid assets exist, the borrower can have their lending institution fill out a VA Form 26-8497a, obtain certified copies of the last two period statements, or a copy of Internet based statements for the last two months, provided the URL shows on the printed copy.

The VA also requires a credit analysis. However, the borrower’s FICO score is not the determining factor for a VA home loan. Bad credit is determined by examining the last two years of general payment history, with extra emphasis on housing payments. If the applicant does not currently have a mortgage, the lender may ask the borrower to provide proof of rental payments. An excellent record of on-time rent payments can help overcome poor credit events that occurred in the past. For example, if a VA home loan bad credit applicant has a poor credit rating due to a bankruptcy that was discharged twenty five months in the past, but has no late payments for the last 24 months and can show proof of 24 months of on-time rent payment; the lender can consider the person a reasonable credit risk even though the FICO score that most lenders would use is only a 600 due to the bankruptcy.

In the case of adverse credit events such as collections, simply 12 months of satisfactory payment history after the pay-off of the collection accounts is considered “good credit” when for a non VA home loan it would be bad credit. An open collection account or two does not necessarily disqualify a borrower, so long as they have the means to pay them off.

VA lenders are also directed to consider Consumer Credit Counseling program participation a neutral credit occurrence and not a negative one. The concept is that a graduate of a CCC payment program made poor decisions regarding credit in the past, but has received training and met their obligations with the assistance of the CCC payment program.

In essence, so long as the borrower shows excellent payment history for the last 12 months under most circumstances, or 24 months post foreclosure of a conventional loan, even a low FICO score does not hamper VA home loans. Bad credit is defined differently for borrowers and lenders participation in this program.