How Credit Affects VA Loans

How Credit Affects VA Loans

Capital Bank is a national lender with expertise in VA Loans ­– so you feel like you are speaking to your local expert.

Whether you apply for a new loan or a VA refinance, you must convince the bank to take a risk on you. Even if you have your Certificate of Eligibility in hand to show you have paid your dues in terms of service for these loans, a bad credit record can doom your request. For the VA refinance process, the credit requirements are not as strict as for a new loan, but you must still convince the bank that you have the money to pay the mortgage and other debts. With a VA loan, the government backs up to 25% of the loan, so all taxpayers are in jeopardy if loan applicants or refinancers are poor credit risks.

Proof Of Current Income

When you apply for a VA loan or a VA refinance from Capital Bank, N.A., you will need to provide your lender with proof of income, which includes pay stubs to show you have an income sufficient to make the payments. You will also need to provide tax forms, banking information, Social Security numbers, and other personal details. As long as your current information shows that you have the means to pay your bills in the future, you are likely to qualify for your VA home loan benefits.

Credit Score Requirements

The VA does not have a minimum credit score requirement, although it expects the lender to verify the borrower’s credit history. Many times, the lender will have standards that set a 620-680 minimum credit score. To obtain a new loan or a VA refinance, you may have to work on your credit record to qualify for a loan. Each lender has its own criteria. Your credit does not have to be perfect, but it needs to show a pattern of responsibility.

Your credit score or FICO, which your VA-approved lender will evaluate, is based on a mathematical formula. Various components of your credit habits are assigned a value of your total score. These are:

  • Payment history: 35%
  • Available credit: 30%
  • Length of credit: 15%
  • Types of credit: 10%
  • Credit inquiries: 10%

Improving Your Credit Score

While you cannot erase the past, you can improve your record by making your payments on time and paying down your credit cards so that you are using less than your available credit (about 30% is ideal). These two actions will show a lender that you are using credit and paying off debt responsibly. Depending on your circumstances, your lender for a new loan or VA refinance may concentrate more on the last year or so. As credit scores rise, the lender may give you the benefit of the doubt and approve your loan.

For example, some current service members and Veterans have credit problems related to past or current deployments. While you are gone, you want to maintain your credit and prevent anyone from taking out new credit in your name without your consent. If you did not take proper precautions to make sure that your bills were paid on time, you may find yourself with a record of late payments. As noted above, you can improve your credit rating by establishing a record of on-time payments. If you remain on track, a lender is likely to be more forgiving of past problems. Capital Bank, N.A. is happy to work with you so that you can qualify for your VA refinance.

Certifying Your Eligibility

Your first step to claiming your VA home loan benefits for a new home or a VA refinance is to establish your eligibility with the VA. You are granted a Certificate of Eligibility if you have fulfilled at least one of the following criteria:

  • You served 90 days in wartime or 181 days in peace time
  • You are a current service member who has served for at least 90 days
  • You served in the National Guard or Reserves for six years
  • You received a discharge for hardship, at the request of the government, or due to reduction in force, certain medical conditions or a disability
  • You are the un-remarried spouse of a former service person who is missing in action, a prisoner of war, killed in action, or who became disabled during service

Once you have your COE paperwork in hand, you can proceed to apply with the lender. For some types of VA refinance loans, you do not need to obtain a new COE.

Low Credit? Bad Credit? Why A VA Loan Or VA Refinancing Can Still Be Yours!

One of the biggest benefits of using Veteran home loans is that the VA doesn’t set a minimum credit score. However, this doesn’t mean that the banks writing those loans don’t have one! At Capital Bank, N.A., we know you’re more than just a credit score. That’s why we look at a number of variables to determine your qualifications for Veteran home loans.

Credit Building Before Applying For VA Loans

If you don’t have any credit, it’s possible to build some before ever applying for a Veteran loan. This doesn’t have to mean that you should go rack up a lot of credit card debt! Get a major credit card, make a small purchase and pay it off each month.

Showing that you can use credit responsibly will help prove that you’re a good candidate for Veteran loans. If you do carry a balance, try to keep it under 30% of your available credit.

What If Your Credit Score Isn’t Great? Can You Still Get A Veteran Mortgage?

Your credit score is just one factor we use to determine your ability to repay Veteran mortgages. We look at more than just your credit score, including:

  • Repayment practices for the last 12 months
  • Past bankruptcies
  • Tax liens
  • Debts that were sent to collections

If you have ever had a bankruptcy, tax liens or debts that were sent to collections, we’ll look past those 12 months to see how long ago your financial difficulties were.

A negative blip on your credit report won’t automatically disqualify you from a VA mortgage or VA loan refinance. We want to help you with buying a home and achieving the American dream, so we’ll do everything possible to work with you and help you get the VA mortgage you’ve earned.

Rebuilding Your Credit

If you do have recent negatives on your credit report, it’s possible to fix them.

  • First, go through each obligation and make sure it’s reported correctly! It’s not uncommon for Veterans and service members to find errors on their credit report, especially if they move around a lot because of their military service.
  • If you do find errors, contact the creditors and the credit bureaus and ask them to remove the incorrect information, and don’t forget to follow up to ensure that it’s done.
  • If the negatives are accurate, work to make consistent payments for the next 12 months. This can help push down negative results and lenders will be able to see that you’re working to rebuild your credit.

Alternatives To A VA Loan

If you find that you don’t meet the VA loan eligibility requirements, we encourage you to apply for an FHA loan instead. Capital Bank, N.A. is an FHA-approved lender and we are expertly versed in the various types of FHA loans, so we know how to get you the best mortgage possible! One benefit of FHA loans is that they have a smaller down payment requirement than conventional home mortgages, which means they’re ideal for potential homeowners who don’t have the full 20% down payment saved.

Whether you’re looking for a new VA loan, an FHA loan or even a Veteran loan refinancing option, the knowledgeable and experienced Veteran mortgage professionals at Capital Bank, N.A. can help you. Fill out our simple VA loan prequalification form, and a local mortgage professional will call you to walk you through the process and answer any questions you have about your credit or other special circumstances.

Don’t assume that a low or poor credit score automatically disqualifies you from a Veteran home loan and owning the home of your dreams — contact us today and let us help get you into the home of your dreams!