Do unpaid obligations, such as collections and charge-offs, listed on a credit report have to be paid off? What about judgments or liens?
The VA does not require charge-offs and collection accounts to be paid off. The underwriter should obtain the Veteran's explanation and supporting documentation if needed. If the accounts are dealt with by a steady repayment plan, this may be considered as a positive factor. If there has not been repayment scheduled, paying them off now does not alter the unsatisfactory credit.
Judgments, Federal debts and liens must be paid in full or have a written repayment agreement. Written repayment agreements must be included in the debt section of the loan analysis form. This is specified in Chapter 4 of the
VA Lender's Handbook.
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What procedures should I follow if I get a CAIVRS "hit"?
The following steps should be taken:
- Contact the Veteran or co-applicant regarding the claim to find out if they know about it, or have proof that it has been paid in full/resolved.
- If the applicant is not aware of the item or needs to resolve it, someone must contact the federal agency listing the debt. A listing of agencies and contact phone numbers are contained in Chapter 4 of the VA Lender's Handbook.
- If it is determined that there is no claim against the Veteran, the lender should document this by written confirmation from the agency or the lender telephone certification.
- The Housing and Urban Development's (HUD's) CAIVRS system may not be update quickly so do not hold up the approval or closing.
- If there is a loss to the government, the lender must obtain proof of payoff or a written repayment agreement.
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When can a person with a bankruptcy on the credit report apply for a VA loan?
The date of the discharge is the major determining factor. If a bankruptcy was discharged more than 2 years ago it may be disregarded.
If the bankruptcy was discharged between 1-2 years ago, the Veteran must have reestablished credit by some means and the cause of the bankruptcy must be documented as having been beyond the control of the applicant (
i.e., job loss or medical issues).
If the bankruptcy was discharged less than a year ago, it will not generally be possible to ascertain satisfactory credit risk.
Marginal cases should be addressed in the remarks section of the Loan Analysis Form. The guidelines for bankruptcy may be found in Chapter 4 of the
VA Lender's Handbook.
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How do you treat Consumer Credit Counseling Services (CCCS)?
If an applicant is currently in consumer credit counseling, they must have demonstrated a 12 month history of timely payments and the counseling agency must approve of the new credit.
Occasionally an applicant chooses to participate in consumer credit counseling to obtain assistance with finances, even without being behind in payments. In these cases, consumer credit counseling may be considered a neutral or even a positive factor. Do not treat this as a negative credit item if the Veteran entered the consumer credit counseling plan before reaching the point of having bad credit.
Specifics on consumer credit counseling may be found in Chapter 4 of the
VA Lender's Handbook.
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Is a Veteran eligible for a loan if s/he is behind on child support payments by $1,000 or more?
Child support is a credit obligation and if it is in arrears, it must be addressed. The Veteran may have a legal action pending. In those cases the underwriter must look at the documentation and explanation submitted. If the documentation supports a Veteran's claim that they are not responsible for the debt and merely awaiting the court records to be finalized this would not be considered a derogatory item. All other cases with pending legal action must be looked at on a case by case basis. Should you need advice on these, make sure you develop the situation completely then speak with your supervisor or VA Regional Loan Center for guidance. If the Veteran is behind due to financial matters, the underwriter must take the following into account:
- Is there is a repayment schedule?
- How it will be repaid?
- Will the cause of the delinquency have an impact on the Veteran's proposed loan scenario?
The underwriter must exercise good judgment on a case by case basis.
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To determine whether the Veteran has a satisfactory payment history, how many months must be reviewed?
Generally VA requires a 12-month history of satisfactory payment.
Any late payments within the past year should be developed for an explanation and supporting documentation obtained if needed. The underwriter must make a credit decision based on all the documentation of that particular Veteran. Comments should be placed in the remarks section of the loan analysis for any loans approved which have late payments in the past year.
In marginal cases it may be helpful to review the mortgage or rental history carefully as the applicant's past repayment history could establish how motivated the applicant is to make timely mortgage payments in the future.
Information on adverse credit or other scenarios such as bankruptcy and foreclosures may be found in Chapter 4 of the
VA Lender's Handbook.
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The Veteran has been living with his/her parents and does not have any loans or credit cards. What does the Veteran need to provide to be considered credit worthy?
The underwriter must look at these cases individually and consider if there were any past credit or other compensating factors. The VA does not consider the lack of credit a negative factor.
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Does VA use credit scoring? If so is there a minimum score?
No, the VA does not use credit scoring. The underwriter should review the credit of each Veteran individually. The VA does recognize that credit scoring is a standard mortgage industry practice and a high credit score may be listed as one of several compensating factors in the remarks section of the loan analysis form. Should the underwriter be using an automated underwriting system such as Loan Prospector, s/he would follow specific guidelines in accordance to the automated underwriting system.
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Can payment plans be used on derogatory credit? If so how long do they have to have been established?
If there are derogatory credit issues but the Veteran has provided acceptable documentation that timely payments have been made for 12 months, the underwriter may consider this a positive factor. Be sure to list the payment as an obligation.
If the borrower has been making payments for less than a year, the underwriter must to determine if the overall credit is acceptable. The underwriter must use judgment on a case by case basis. Annotate the remarks section of the VA Loan Analysis Form (VAF 26-6393) for any issues involving credit.
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