In the last article we began talking about your credit history, how it can affect your VA loan, and what the lender looks for on credit reports. We discussed specifically, the two types of credit reports that the VA will accept and that the lender should look for prior repayment history, and more specifically, previous rent or mortgage payment history. We also discussed borrowers with little or no credit history. In this article, we’ll focus on the rest of the things that lenders look for in a credit report.
Because of the Equal Credit Opportunity Act (ECOA), the borrower can request that the lender consider any accounts that are under their spouse’s name as long as it can be shown that the account contributes to the overall picture of the applicant’s creditworthiness. If the spouse is not going to be on the loan, and the borrower does not request that the account be considered for their own credit, the account will not be considered for the loan. In addition to this, the ECOA also prohibits lenders from using the credit information of a spouse who will not be contractually obligated on the loan unless the borrower is relying on child support or alimony from the spouse or if the loan is being originated in a community property state. For the most part, spouses co-sign on the loan so this won’t come up, but it is good to know your and your spouse’s rights in the event that you’d like to sign for a loan without your spouse co-signing.
We’re going to get into some sensitive information here: adverse data and how it is handled. On the one hand, this gives you as the borrower an inside look at how lenders will treat your credit, but it is crucial to remember (and it even says so in the Handbook itself), that what it said here is not legal advice, and is by no means comprehensive. Many scenarios exist that are not explicitly covered, and these guidelines are simply the VA’s guidelines. Most, if not all, lenders have their own rules and guidelines to follow in the case of adverse data on a credit report. With all that said, let’s get started.
For borrowers who have not had satisfactory credit in the past, but have been repairing it, a 12-month history of satisfactory payments in all debts is required for the VA to be comfortable with a lender considering the credit reestablished. The Handbook gives the following example: “…assume a credit report reveals several unpaid collections, including some which have been outstanding for many years. Once the borrower has satisfied the obligations, and then makes timely payments on subsequent obligations for at least 12 months, satisfactory credit is reestablished.”
So what about debts that have gone to collections? Isolated collection accounts do not necessarily have to be paid off as a condition for loan approval. DISCLAIMER: while the previous statement may sound absolutely amazing, the borrower needs to remember a few things. First, this is just as far as the VA is concerned; every lender will have their own policies in place in regards to collections accounts, and many of them will require the accounts to be paid off. Second, the word “isolated” means that among a sea of properly paid-off debts there may be one small rock of an unpaid medical bill that went to collections. Even if unpaid collections accounts will not prevent the borrower from loan approval, the accounts still need to be considered part of the credit history and contribute to the overall determination.
In the case where the borrower has a disputed account, the lender may consider a claim of the borrower unless the balance has been reduced to judgment. Important note for the borrower, any disputed accounts that have been reduced to judgment must be paid off – and if no repayment plan is in place and in the process of being executed before the lender discovers the account, paying off the accounts after the fact will not alter the unsatisfactory record of payment. In the next article, we’ll discuss bankruptcies in more detail and talk about foreclosures.