Sometimes life can be incredibly difficult, and you may find yourself in a situation where your credit has been damaged. While this may feel as if there are no home buying options, we may have the perfect solution. At MHSLending we offer a Damaged Credit VA Loan to those who need it. This loan helps us fulfill our goal of finding solutions to make every veteran or military member a homeowner when they are ready. Buying a home is an incredible feeling and we want to help make that a reality for you.
Guidelines and Requirements
Damaged credit VA Loans are available to help those who may be eligible for the VA Loan but have been turned away due to credit issues in their past. This may seem too good to be true, but it’s actually pretty simple how we’re able to offer these loans. Have you ever heard the term lender overlay before? Lender overlays are rules that banks and lenders add in order to protect themselves from the risk of lending money to the wrong person. These overlays are what get in the way for some borrowers with bad credit. You see, regardless of what you may have heard, the VA loan has no specific credit score requirement. Although they do have requirements revolving around credit in general, which we will cover further down this page, they don’t actually have any specific number tied to the credit score that a veteran or service member must-have. Any lender that you may have come across, that says the VA loan has a (insert credit score number) credit score requirement is speaking specifically about their company’s (or their investor’s) guidelines. These are known as “lender overlays”
At MHSLending we don’t have any lender overlays, which is how we are able to help clients who normally have a difficult time getting a VA Loan. Because there are no lender overlays to worry about, we have been able to help clients with sub-500 credit scores buy a home. This makes our Damaged Credit VA Loan a powerful option for buyers who need it.
What does the VA care about in terms of credit?
As we mentioned above, the VA doesn’t have a specific credit score tied to their credit guidelines, but they do have some credit-related requirements, in general, that a lender must follow in order to maintain the VA’s 25% guarantee. In order to qualify for a VA loan, a veteran or service member, regardless of credit score, must be able to prove that they have 12 months of reestablished credit and 24 months of on-time housing payments on either their current rent or mortgage.
If you are short on either one of those things, we encourage you to still apply so that we may be able to outline your current situation and create plan for you to reestablish your credit and housing payments, so that you may one day get approved for a VA loan.
What is considered credit?
“Credit” doesn’t have to be a loan or credit card that is reflected on your credit report. Credit can actually be as simple as any monthly payment that you make on a regular basis that can be used to show your ability to make on time payments.
Here is a list of items that can be used, known as alternate tradelines:
- Utility Bills
- Cell Phone Bills
- Subscriptions to TV providers
- WiFi and other accessory bills
- Auto insurance or another type of reoccurring insurance bill
Eligibility and requirements for getting approved
The Damaged Credit VA Loan is an incredible benefit available to help those military and veteran families who may have fallen on hard times. Many military families don’t take advantage of this loan simply because they’ve been turned down by other lenders in the past. The Department of Veterans Affairs has laid out very specific VA Home Loan eligibility requirements. In addition to needing to have 12 months of reestablished credit and 24 months of on time housing payments, eligible veterans also need to fit the following eligibility criteria.
Members of the Army, Navy, Air Force, Marine Corps, or Coast Guards
- If you served between September 15, 1940-present day
- If you’re active duty and have served
- At least 90 consecutive days during war time
- At least 180 consecutive days during peacetime
- Veterans who served 24 months consecutively and were honorably discharged
- Veterans who were discharged prior to 24 months due to service-related injuries may also be eligible
Members of the Reserves and National Guard
- If you have completed 6 years of honorable service
- Who were mobilized for active duty service for at least 90 consecutive days under Title 10 or Title 32 orders
- If you’ve been discharged due to a service-related injury
- If you met requirements during those years
Surviving Military Spouses
- If you’re an unremarried spouse of a veteran who died while in service or from a service-connected disability
- If you’re a spouse of a military member who is a POW (prisoner of war) or MIA (missing in action)
In order to get started on applying for a VA Loan, you’ll need to obtain two critical things first: your Certificate of Eligibility (COE), and a pre-approval.
- Your COE proves that you’re eligible to use the VA Loan benefits and is the document your bank or lender will need during the homebuying process.
- Pre-approvals are preliminary evaluations of potential borrowers by a lender and determine the buying power of a buyer.
Once you have your COE and pre-approval in hand, you can then continue on your home buying journey and start the fun part, shopping for a home.
What happens next?
Once you’ve obtained your COE through the VA or through your VA-approved lender and have been pre-approved, it’s time to jump into the home buying process.
- Go home shopping: this is the fun part! Check out homes that work within your budget and have the amenities you’re looking for
- Submit an offer: once you find the house you’re ready to commit to, it’s time to make an offer and prepare for negotiations!
- Submit updated documents to your lender: this will happen right before you submit an offer that has been accepted. Your lender will supply you with a list of documents to submit and that will get your loan into processing!
- Lock in your interest: once your lender has received your updated documents and the contract, you’ll be given an opportunity to lock in your interest rate. Typically you can lock it in for 15, 30, 45, or 60 days. Be sure to lock your rate for as long as the negotiated escrow period, or longer! Inspections can take a while so don’t be afraid to go with something outside of 30 days.
- Get a home appraisal and home inspection: now that your offer has been accepted, you’ll move forward with the loan process and will begin the inspection and appraisal process.
- Receive approval: after all your documents have been reviewed you’ll receive underwriting approval and can go to closing.
- Close on your home: after you’ve had an offer accepted, gone through the full approval process and all inspections and are ready to go, your lender will clear you for closing!
- Sign your final loan documents and get the keys to your home: Congratulations, you are a homeowner!
Documents that will be reviewed
As mentioned above, your lender will need to obtain very specific documents and verifications to submit to the underwriters in order to complete the loan process and get approval. These documents include:
- Credit report to ensure the borrower has sufficient credit and no red flags on past credit like bankruptcy or other financial issues, like late payments on their credit report in the last 12 months
- Verifications of Housing to ensure the borrower has no late payments on their rent or mortgage payments in the last 24 months
- Employment verification to show how much income borrowers have now, and any anticipated additional income as laid out in employment agreements. Documents to help with this include:
- W-2’s from the last two years.
- Pay stubs from the last 30-60 days prior to applying.
- Tax Returns from the last two years
- Asset information including statements from all bank accounts such as checking, savings, and retirement accounts.
- Any additional income asset or liability information like dividends, overtime, pension, child support, etc.
- Certificate of Eligibility (also known as COE and document specifically needed for VA Loans only) in order to identify a few critical factors specific to veterans and service members. First, the amount of available entitlement for the veteran or military member is determined, then the status of exempt/non-exempt from the funding fee is confirmed and finally the amount of VA monthly service-connected disability compensation is checked.
If all of these documents are checked and approved, underwriters can issue a “clear to close'' which means borrowers are ready to go to the final stage of the process, closing.
What is the Damaged Credit VA Loan best used for?
This loan program is best used for eligible military members or veterans who may have had past credit issues, but have been caught up on their credit problems in the most recent 12 to 24 months
What kind of home can I buy with this program?
Although we give it this name, this program is just your standard VA loan program and currently doesn't have any home-type restrictions. This means that any home you can buy with a regular VA loan, you can buy with a Damaged Credit VA Loan.
What is the maximum Debt-to-Income ratio for this loan program?
With most loans that are classified within the Damaged Credit VA loan program, the maximum debt to income ratio requirement is 65% including current obligations and the proposed housing payment.
What are the costs for the Damaged Credit VA Loan?
The costs associated with this loan are comparable to that of a general VA Loan with closing costs ranging anywhere from 2% to 4%. It’s important to note that there could be additional costs associated to plans and permitting that you will want to discuss beforehand with your preferred contractor.