A Veterans Administration (VA) loan can be used by qualified veterans to buy a new home or refinance an existing mortgage. Contrary to popular myth, veterans with a bad credit score are not automatically disqualified for home loans backed by the VA. The VA encourages participating lenders to evaluate credit worthiness beyond the borrower's current score. And while a bad credit score may constitute a serious strike against the applicant, lenders may consider approving applicants who have maintained a restored, sound financial history for at least one year.
Credit Reporting and VA Loans
During the application process for VA loans, the government requires all applicants to provide credit data no older than 180 days in the form of:
- Residential Mortgage Credit Reports (RMCR), or
- Three-file Merged Credit Reports (MCR).
The VA Lenders Handbook establishes the credit criteria required of all participating financial institutions reviewing applicants for VA-backed home loans. In assessing risk, lenders are directed to examine the applicant's rent and mortgage payment history as a prime indictor of the borrower's "motivation" to make future payments on time.
What if I Have No Credit History?
The VA does not consider the lack of credit history an "adverse factor." There may be recently separated veteran's that qualify based on service records, but who have yet to save or borrow money. Some candidates may only use cash as a consequence of credit counseling or bankruptcies. Qualified veterans who have reestablished credit for 12 months, those with homes in foreclosure, or those with accounts in dispute or sent to collections are also NOT automatically disqualified for backing by the VA. Applicants with bankruptcies (one year since Chapter 7 or two years since Chapter 13) must also demonstrate that they have made timely, satisfactory payments on all debt over the previous 12 months.
VA Loans with Bad Credit Alternatives
There are mitigating circumstances for those with poor credit scores that lenders may take into consideration, including bad credit caused by temporary setbacks such as death of the earner, catastrophic illness, work shutdowns, or layoffs. A good first step is to search for loan offers from participating lenders to get a view of the landscape. For those who are not approved, consider FHA housing loans, which also recommend that underwriters consider an applicant's complete credit profile in addition to a credit score.
Understanding the CAIVRS Roadblock
While bad credit is not always a show-stopper in the VA loan application process, appearing in the government's database of people who owe them money will bring the process to a full stop. The VA (and FHA) will not back loans made to anyone with debts or delinquencies on federal student loans, small business loans or home mortgages. Thcredit alert interactive voice response systeme credit alert interactive voice response system (CAIVRS) sniffs out people on its "deadbeat database" as a watchdog for seven different government departments. Veterans that might otherwise qualify for the VA benefits will need to settle their score with the government before applying for additional funds. If there's false information in an applicant's CAIVRS, they should contact their regional VA representative.