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VA loans must still meet credit score requirements.
Well, the official VA website says that loans are not credit score driven but that reasonable credit is required. In addition, a number of mortgage companies have additional guidelines for VA loans, among them credit worthiness, although from their guidelines it seemed to lean toward sufficient income with reasonable credit and not high credit scores. Of course, every lender is different on how they deal with individual mortgages. Some will work with lower credit scores as long as they have sufficient debt-to-income ratio. They also look for a history of making payments on time over the previous year.
The bottom line is the market is too dicey for any lender to originate a marginal loan. True, the VA does not have a minimum credit score, but the climate has changed dramatically. The VA guarantee or the FHA mortgage insurance is no longer the gold standard for a loan approval. See, that guarantee or insurance only covers a percentage of loss for the lender. Declining values change the entire equation, so that guarantee or insurance really doesn't adequately offset the potential losses of a defaulted loan.
Throw away what you learned up to a year ago and go back to what you knew in the late 70's and early 80's to get a loan. Only this time around, women can get a loan in their own name, without their husband's permission. Things have changed and there are continuing signs the clamp-down is here to stay and most likely will tighten further.
So my father once again is considering looking for a house after looking for a home in November of last year. He found a pretty nice home that is priced at around $144,000. Again, he plans to take out a VA loan for about the same amount of the cost of the home. He retired a few months ago however so his retirement income is $2,000/month, although he plans to work in the near future. His current expenses (not including existing utilities or rent) include:
$186/month finance payment ($1,800 left to pay)
$256/month various credit cards and non-utility related expentures ($3,100 left to pay)
$57/month cell phone bill
The aforementioned expenses should be paid off within the next 6-8 months. Credit score is around the low 600s, few derogatory things in his report but those are over 3 years old, everything else is on time.
Again, he plans to use my brother as a co-borrower who's still getting $714/month through disability ($8,568/year), although he has no credit at all. Their combined income is around $2,700/month but would be more if he could get another job.
That said, what are the chances that he'll be eligible for a loan this time around?
Sorry to tell you, but no chance unless credit score is 620. Every lender i deal with has an overlay on VA guidelines. They require a minimum 620 FICO score.
Is your brother going to be living in the new home with your father? If not, then I don't know of any lenders permitting non-occupying co-borrowers to allowed on a VA mortgage.
If he is going to be occupying the new home, then he can be on the mortgage, but does your brother also have VA eligibility?
If so, then he and your father will need to contact the VA Regional Loan Center that covers the location of the new home in order to get approval for them to both be on the mortgage together. I don't see why it would be an issue, but still the approval must be obtained.
If not, then VA will only guarantee the Veteran's portion of the loan (which would be 50% of the loan amount since there are only 2 borrowers) and because of this, lenders will require a 25% down payment on the non-guaranteed 50%... and so it translates to a 12.5% down payment on the entire price.
Assuming the $2k/mo retirement income is all non-taxable, it can be grossed up by 125% for qualifying purposes... converting it into $2,500/mo in qualifying income.
Let's assume a 4.5% interest rate, a 1% tax rate, $60/mo in homeowners insurance, and no HOA fees. On a $144k sales price (assuming this is the first time use of your father's VA loan) the P&I payment will be $745.31/mo, taxes $120/mo, and that $60/mo of insurance brings the total payment to $925.31. Add the $186/mo car payment + $256/mo in credit card required minimum payments, that is $1,367.31/mo in debt payments. Divided by $2,500 in gross qualifying income is a 54.692% debt ratio and is extremely unlikely to get approved, especially without excellent credit.
If your brother can be on the loan, and let's say he is a Veteran with VA eligibility, and assuming the disability income is permanent or likely to continue for at least the next 3 years, his income should be able to help qualify. Disability income is almost always non-taxable, if so, then the $714/mo of income he has can be grossed up to $892.50/mo for qualifying purposes. Adding that to the equation it reduces the debt ratio down to 40.3%, which is ideal for VA.
Like Victor pointed out, practically every lender out there requires 620 scores for VA mortgages. Once both your father & brother are there, since your father's derog's were 36+ months ago and he's had re-established credit since, his credit should be looking good for approval.
13% of people have scores > 800,
45% are from 700 to 800,
27% are from 600 to 700,
doing the math, that leaves 15% below 600.
That resembles a statistically "normal" curve. The site doesn't map out typical behavior/scores.
For instance, if someone made $50k, was single, no kids/support payments, was current on
everything, but had $20k in credit card debt, I'd rank them < 600, but what do I know?
OTOH, if someone made $20k, had no debt, I'd rank them > 800,
but they would probably score < 600 if they had no credit history.
I also assume that 1-2 years after bankruptcy one would
score < 400 no matter what their debt/income/other added up to.
I aditionally assume that even 8-9 years after, it would still be < 600.
It's too bad none of that mattered for the past ten years with the exception of the last two.
mortimer - you are confusing credit scoring with underwriting a loan, also your post is a bit off the topic of this thread.
Income has no direct impact on credit scores. Credit scores are primarily impacted by payment history, amounts owed, duration of history, new credit, and types of credit.
13% of people have scores > 800,
45% are from 700 to 800,
27% are from 600 to 700,
doing the math, that leaves 15% below 600.
That resembles a statistically "normal" curve. The site doesn't map out typical behavior/scores.
For instance, if someone made $50k, was single, no kids/support payments, was current on
everything, but had $20k in credit card debt, I'd rank them < 600, but what do I know?
OTOH, if someone made $20k, had no debt, I'd rank them > 800,
but they would probably score < 600 if they had no credit history.
I also assume that 1-2 years after bankruptcy one would
score < 400 no matter what their debt/income/other added up to.
I aditionally assume that even 8-9 years after, it would still be < 600.
It's too bad none of that mattered for the past ten years with the exception of the last two.
Most of the general pubilc do not understand how credit scoring acutally works. As such, most of your assumptions are incorrect.
1) Income has zero bearing on credit scoring. A person who makes $500k/yr. with $20k credit card debt would have the exact same score as the person who makes $20k/yr. who has $20k in credit card debt (assuming the rest of their credit history was identical).
2) Someone with no credit history doesn't have any scores.
3) 1-2 years after bankruptcy a person could have a score of 600-700.
4) 8-9 years after bankruptcy a person could have a score of 700+
Is your brother going to be living in the new home with your father? If not, then I don't know of any lenders permitting non-occupying co-borrowers to allowed on a VA mortgage.
If he is going to be occupying the new home, then he can be on the mortgage, but does your brother also have VA eligibility?
If so, then he and your father will need to contact the VA Regional Loan Center that covers the location of the new home in order to get approval for them to both be on the mortgage together. I don't see why it would be an issue, but still the approval must be obtained.
If not, then VA will only guarantee the Veteran's portion of the loan (which would be 50% of the loan amount since there are only 2 borrowers) and because of this, lenders will require a 25% down payment on the non-guaranteed 50%... and so it translates to a 12.5% down payment on the entire price.
Assuming the $2k/mo retirement income is all non-taxable, it can be grossed up by 125% for qualifying purposes... converting it into $2,500/mo in qualifying income.
Let's assume a 4.5% interest rate, a 1% tax rate, $60/mo in homeowners insurance, and no HOA fees. On a $144k sales price (assuming this is the first time use of your father's VA loan) the P&I payment will be $745.31/mo, taxes $120/mo, and that $60/mo of insurance brings the total payment to $925.31. Add the $186/mo car payment + $256/mo in credit card required minimum payments, that is $1,367.31/mo in debt payments. Divided by $2,500 in gross qualifying income is a 54.692% debt ratio and is extremely unlikely to get approved, especially without excellent credit.
If your brother can be on the loan, and let's say he is a Veteran with VA eligibility, and assuming the disability income is permanent or likely to continue for at least the next 3 years, his income should be able to help qualify. Disability income is almost always non-taxable, if so, then the $714/mo of income he has can be grossed up to $892.50/mo for qualifying purposes. Adding that to the equation it reduces the debt ratio down to 40.3%, which is ideal for VA.
Like Victor pointed out, practically every lender out there requires 620 scores for VA mortgages. Once both your father & brother are there, since your father's derog's were 36+ months ago and he's had re-established credit since, his credit should be looking good for approval.
My brother is 21 and autistic so he's living with us. In addition, his disability is long-term so his income is expected to be permanent. My father handles his checking account including depositing of checks and other paperwork since he's not capable of doing it himself. However, he's never served in the Armed Forces so I guess that would make him ineligible. So in other words, if my brother is ineligible, then would it be more wise not to even include him as a co-borrower? Also, I assume that when my father finally does pay his remaining bills off, he'll be within the debt ratio of 40% making him eligible? What is the overall limit?
Last edited by neurodistortion; 12-02-2010 at 05:44 AM..
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