How to get a Va Loan with low credit scores
Sparkman Lending
Sparkman Lending
Published on January 14, 2022
How to get a Va Loan with low credit scores

How to get a Va Loan with low credit scores

How to get a VA loan with low credit scores

Verify my mortgage eligibility (May 24th, 2022)

Ok, guys, this is a big topic and I am taking my time to research and make sure I am covering all the bases. I am pulling my 15 years of experience, speaking to many underwriters, the VA regional loan center, mortgage companies, and fully understanding the VA guidelines to put this together to better serve my fellow Veterans. I started this mortgage company to serve the underserved. "No soldier left behind".

So here is what you need to know about getting a VA loan with a low credit score.

  1. The VA does not have a minimum credit score requirement – rather content requirements
  2. Investors who fund mortgages with their money do have credit score requirements
  3. Automated underwriting system

Automated mortgage underwriting is the process where advanced artificial intelligence (AI) technology electronically undertakes the decision-making process for granting mortgage loans by analyzing one’s credit report and mortgage application data. 

  1. Understanding VA Pamphlet 26-7, Revised – Chapter 4 – part 7. b: How to analyze credit.
    1. Lenders are encouraged to make VA loans to all qualified Veterans who apply. VA's underwriting standards are intended to provide guidelines for underwriters. Decisions must be based on sound application of the standards, and underwriters are expected to use good judgment and flexibility in applying underwriting guidelines. Not all possible circumstances are addressed therefore, underwriters must apply reasonable judgment and flexibility in administering this important Veterans' benefit.
    2. By law, VA may only guarantee a loan when it is possible to determine that the Veteran is a satisfactory credit risk, and has present or verified anticipated income that bears a proper relation to the anticipated terms of repayment.
    3. Housing history – 24 mo 
      1. The borrower's most recent 24-month rental history and any outstanding, assumed, or recently retired mortgages must be verified and rated. Housing expense payment history is often a primary indicator of how motivated the borrower is to make timely mortgage payments in the future.
    4. Absence of credit history: 
      1. Max Debt to Income Ratio (DTI) 35%
      2. FIO must show no findings
      3. 3 non-traditional credit tradelines MUST be established within 12months history and no history of late payments (either by credit supplement or 12months canceled checks
        1. Housing/rent payments
        2. Must have 2 of the following
          1. Gas
          2. Water
          3. Electricity
          4. Internet
          5. Telephone service  
      4. No renovation or manufactured loans allowed
    5. Adverse Credit Data

In circumstances not involving bankruptcy, satisfactory credit is generally considered to be re-established after the borrower(s), have made satisfactory payments for 12 months after the date the last derogatory credit item was satisfied. If a credit report reveals numerous unpaid collections and/or accounts that are not being paid timely, including some which have been outstanding for many years, then once the borrower has satisfied the obligations, and then makes timely payments on subsequent obligations for at least 12 months, satisfactory credit is considered re-established.

  1. Collection Accounts
    1. If the transaction has received an AUS approval, the findings recommendation may be followed. 
    2. If the transaction is manually underwritten, 
      1. Medical collections > $10,000 may be required to be paid prior to or at closing. 
      2. Non-medical collections > $7500 may be required to be paid prior to or at closing
      3. Manually underwritten loans with non-medical collections > $7500 and DTI >41% require a minimum of 2 compensating factors and any outstanding tax liens and judgments must be paid at closing.  
    3. Isolated collection accounts do not necessarily have to be paid off as a condition for loan approval. 
      1. A credit report may show numerous satisfactory accounts and one or two unpaid medical (or other) collections. 
      2. In such instances, while it would be preferable to have collections paid, it would not necessarily be a requirement for loan approval.
    4. However, collection accounts must be considered part of the borrower's overall credit history and unpaid collection accounts should be considered open, recent credit.
    5. Borrowers with a history of collection accounts should have re-established satisfactory credit in order to be considered a satisfactory credit risk.
    6. While VA does not require that collection accounts be paid off prior to closing if the borrower's overall credit is acceptable, an underwriter must address the existence of the collection account(s) with an explanation on VA Form 26-6393, Loan Analysis, for excluding the negative credit history they represent.
    7. If the collection account is listed on the credit report with a minimum payment, then the debt should be recognized at the minimum payment amount.
  2. Charged off Accounts
    1. These accounts are typically collections in which the creditor is no longer pursuing the collection of the account. 
    2. The underwriter must address the circumstances regarding the negative credit history when reviewing the overall credit of the borrower(s).
  3. Federal debts
    1. Any indicators of the borrower having delinquent federal debt (which include owed taxes that have not yet become judgments) require additional verification. 
    2. Any federal debt found to be delinquent disqualifies the borrower from obtaining any government financing. 
    3. Sources to be evaluated include bank statements, credit reports, CAIVRS, title searches, repayment plans, and any other information provided. 
    4. Borrowers who have delinquent debts but can be verified to have made arrangements that bring them into compliance with the Debt Collection Improvement Act (DCIA), may be approved.  
  4. Judgments
    1. Borrowers with open judgments or liens, including tax judgments, on credit or title searches are not eligible for financing. 
    2. An exception may be made for judgments that have had repayment plans initiated which have a minimum of 12 months history of payments completed. 
  5. Bankruptcies 
    1. Chapter 7 bankruptcies 
      1. may be manually underwritten with at least one-year of seasoning completed as of the closing date. 
      2. Verified extenuating circumstances must be documented, and the applicant or spouse must have obtained consumer items on credit subsequent to the bankruptcy with a satisfactory payment record. 
    2. Chapter 13 bankruptcies 
      1. may be manually underwritten with at least one year of payments completed according to plan and on time. 
      2. Subject to manual underwriting requirements, and bankruptcy court approval. 
  6. Foreclosures/DeedinLieu/Short Sales 
    1. Seasoning requirement Foreclosures require 2-year seasoning from recorded discharge date, or if sufficiently documented, the date all parties executed the foreclosure instrument. 
    2. Deed in Lieu foreclosures and Short Sales may have no seasoning if late payments were not involved in the sale. 
    3. Extenuating Circumstances Foreclosures not meeting seasoning may be considered for approval as a manual underwrite with documented and verified extenuating circumstances. 
    4. At least one year must have passed since the completion of the foreclosure.  
  1. Manual underwriting
    1. Any loan that does not receive AUS approval will be considered for a manual underwrite and may be acceptable if the loan is approved by the underwriter, subject to all applicable requirements detailed in this guide. 
      1. Any loan over 41% DTI must meet 120% residual income and have strong compensating factors.
    2. Compensating factors may include:  
      1. Excellent credit history (no derogatory credit in the most recent 24 months)  
      2. Conservative use of consumer credit  
      3. Minimal consumer debt  
      4. Long-term employment (minimum of 24 months with current employer)  
      5. At least 2 months liquid assets/reserves (Vested available retirement accounts eligible)  
      6. Sizable down payment (5% or greater)  
      7. Minimal payment shock (25% or less)  
      8. Military benefits (Active Duty and/or Retirement benefits)
  2. Extenuating circumstances are defined as an event 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. The circumstances presented must be documented and verified. Divorce is not generally viewed as beyond the control of the borrower and/or spouse.  
  3. Pitching the underwriter 
    1. Usually consist of putting together a tight short and simple explanation of the circumstances that happened, how you are past the event and it will never happen again, and how by obtaining this loan, you will be in a better position. 
  4. Interest rates
    1. Interest rates are higher and tiered based on scores. Below is what it currently  cost expressed in a percentage of the loan amount. This changes ofter but gives you an example 
      1. 620 – 639 = -.25%
      2. 600 – 619 =  -1%
      3. 580 – 599 = -1.75%
      4. 550 – 579 = -2.5%
      5. 500 – 550 = -2% (wierd right?)
  5. Credit repair
    1. Yes. I am a huge fan! If we have time, I will always 100% recommend you sign up for credit repair. It normally costs $100 or so to sign up and $100 monthly
    2. Average 4-6 months time frame 
    3. I have a credit repair partner who we have worked with for 15 years who is the best in the business. We have pre-negotiated preferred rates for our fellow Veterans
    4. https://yournextcreditscore.com/ 
  6. Refinancing 
    1. The end game goal here could be just to buy the house and get enrolled in a credit repair program and refinance within a year. 
    2. IF you refinance or sell your home within the first 7 months, an Early Payoff penalty hits me as the broker.
    3. The servicing company comes back to me and takes back all the compensation that we earned as a broker. Obviously, this is not good for me. We ask out of respect that when the time is right that you do your refinance through our company to avoid this from hurting our business and our ability to help other Veterans in the future. 
    4. We will always try to get your refinance with the same servicing company first as long as they have competitive rates for your new credit situation
    5. Obviously, I want to get everyone the lowest rate possible so we will help you walk through that when the time comes. 
  7. If there are real estate agents involved in your transaction, they need to know that you are using this program. The sellers will need to be on board as it is not a guarantee that you will get the loan until the underwriter clears it to close.

Show me today's rates (May 24th, 2022)
Sparkman Lending
Sparkman Lending Murfreesboro TN
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