This guide covers VA derogatory credit mortgage guidelines on VA loans. VA derogatory credit mortgage guidelines on VA loans are very lenient. VA mortgages have the most lenient lending guidelines than any other loan program. The Department of Veterans Affairs (the VA) is the government agency that governs VA loans to eligible members of the U.S. Armed Services.

The Department of Veterans Affairs created very lenient mortgage requirements to promote homeownership to all eligible  active duty, retired, and spouses of eligible veterans. Eligible veterans are those with a Certificate of Eligibility.  

Many homebuyers think they need perfect credit and low debt-to-income ratios to qualify for VA mortgages. This is absolutely not the case. Waiting period after bankruptcy and bankruptcy  is two year after discharge date of Chapter 7 Bankruptcy or a housing event whereas HUD and the USDA has a waiting period of three years after a housing event. HUD, the parent of FHA, has a two year waiting period after Chapter 7 Bankruptcy and three years after a housing event.

VA Agency Guidelines Versus Lender Overlays

There are two types of lending guidelines mortgage companies adhere to when it comes to VA Loans.. All lenders need to meet VA mortgage guidelines on VA home loans. However, every mortgage company can have its own lender overlays that is above and beyond those of the minimum VA agency lending guidelines

The additional lending requirements imposed by each individual lender is call lender overlays on VA loans. A lender can set any lender overlay they want. It is perfectly legal.

For example, there is no minimum credit score requirement on VA Loans by the VA. However, most lenders will require borrowers to have a 620 or higher credit score requirement. This holds true even though the VA does not require a minimum credit score requirement.

VA Agency Guidelines versus Overlays by Mortgage Lenders

The Department of Veterans Affairs (VA) has specific guidelines regarding derogatory credit regarding VA home loans. In the following sections, we will cover some key points about VA agency guidelines versus overlays by mortgage lenders on VA home loans.

VA Derogatory Credit Mortgage Guidelines and Requirements

The VA doesn’t have a minimum credit score requirement, but most lenders typically look for a credit score of at least 620. However, individual lenders may have their credit score requirements.

VA Derogatory Credit Mortgage Guidelines on Derogatory Credit

Derogatory credit refers to negative items on your credit report, such as late payments, collections, bankruptcies, foreclosures, or judgments. 

Waiting Period Guidelines After Bankruptcy and Foreclosure

Depending on the type of derogatory credit, there may be waiting periods before you can qualify for a VA loan. For example: Bankruptcy:

A housing event is a foreclosure, a deed-in-lieu of foreclosure, or a short sale. In this article, we will cover and discuss VA derogatory credit mortgage guidelines on VA mortgages.

Generally, you’ll need to wait at least two years after a Chapter 7 bankruptcy discharge and at least one year after a Chapter 13 bankruptcy discharge. Foreclosure: Typically, you must wait at least two years after a foreclosure before being eligible for a VA loan. Short Sale: Usually, you’ll need to wait at least two years after a short sale before qualifying for a VA loan.  Click here to apply for VA loan

VA Derogatory Credit Mortgage Guidelines on Rebuilding Credit

Lenders may consider how you’ve managed your credit since the derogatory event. Demonstrating responsible financial behavior, such as timely payments and responsible use of credit, can improve your chances of approval.

VA Derogatory Credit Mortgage Guidelines on Compensating Factors

Sometimes, lenders may consider compensating factors to offset derogatory credit. These factors may include a stable income, a low debt-to-income ratio, significant cash reserves, or a history of making timely rent payments.

Manual Underwriting

Your loan may require manual underwriting if you have derogatory credit or other complicating factors. This means a human underwriter will review your application and financial circumstances more closely.

Lender Requirements

While the VA sets the basic guidelines for VA loans, individual lenders may have additional requirements or overlays. Some lenders may be more lenient or strict regarding derogatory credit. Working with a knowledgeable lender who understands VA loan requirements and can guide you through the process is essential. They can help you understand how derogatory credit may impact your loan application and what steps you can take to improve your chances of approval.

Minimum VA Agency Guidelines Versus Lender Overlays

In this paragraph, we will cover the minimum VA agency guidelines versus typical lender overlays by lenders. Gustan Cho Associates is one of the very few national lenders with no lender overlays on VA home loans:

The Department of Veterans Affairs  does not have a minimum credit score requirement. However, most lenders will require a 620 to 640 credit score as part of their lender overlays. 

Gustan Cho Associates has no lender overlays on VA loans. The team at Gustan Cho Associates are experts in qualifying, originating, approving, and closing borrowers with credit scores down to 500 FICO on VA loans. The Department of Veterans Affairs does not have a maximum debt-to-income ratio cap as long as borrowers can get an approve/eligible per automated underwriting system: However, most lenders have lender overlays on VA home loans. Many mortgage lenders will cap debt-to-income ratios on VA loans to 45% to 50% as part of their overlays.  Speak With Our Loan Officer for Mortgage Loans

VA Derogatory Credit Mortgage Guidelines on Collections and Charge-Off Accounts

VA derogatory credit mortgage guidelines does not require outstanding collections or charged-off accounts to be paid: Most lenders will require outstanding collections and charged-off accounts to be satisfied as part of their lender overlays. The VA does not mandate timely payments in the past 12 months as long as borrowers can get an approve/eligible per AUS: Many lenders will require timely payments in the past 12 to 24 months even though the borrower gets an approve/eligible per AUS.

The Veterans Administration does not require credit tradelines: Many lenders will have overlays that require three credit tradelines for 12 to 24 months as part of their overlays.

Manual Underwriting: VA and FHA loans are the only two loan programs that allow manual underwriting. Many lenders will not entertain manual underwriting on VA and FHA Loans. A large percentage of our borrowers at Gustan Cho Associates are manual underwrites. The bottom line is not all VA lenders have the same requirements and guidelines on VA loans.

VA Derogatory Credit Mortgage Guidelines on Chapter 13 Bankruptcy

The Department of Veterans Affairs does allow borrowers in Chapter 13 Bankruptcy repayment to qualify for VA mortgages. Unfortunately, not all lenders will allow this due to their lender overlays. Borrowers can qualify for VA loans during Chapter 13 Bankruptcy repayment with Trustee approval. Most trustees will approve a home mortgage as long as the borrowers can afford the monthly housing payment. It will need to be a manual underwrite. Chapter 13 does not need to be discharged. There is no waiting period after Chapter 13 Bankruptcy discharged date. Any Chapter 13 discharge that has not been seasoned on the discharged date for less than 2 years needs to be manually underwritten.

Qualifying For VA Mortgages With a Lender With No Overlays

Not all mortgage companies has the same VA derogatory credit mortgage guidelines on VA loans. Just because a borrower may not qualify with one lender does not mean they cannot qualify with a lender with no overlays like Gustan Cho Associates. For more information about this article or to qualify for VA loans with derogatory credit tradelines, please contact us at Gustan Cho Associates at 800-900-8569 or text us for faster response. Or email us at gcho@gustancho.com. Our team at Gustan Cho Associates Mortgage Group is available 7 days a week, evenings, weekends, and holidays.  Qualify for VA Loans with a Lender with No Overlay