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VA Home Loans and Extenuating Circumstances: What You Need To Know

Key Takeaways

1. VA home loans with low credit scores (around 500) are possible, but typically require extenuating circumstances to be approved.

2. The two most commonly accepted extenuating circumstances are medical issues and job loss due to layoffs, which must be well-documented and coincide with the dates of credit issues.

3. A strong letter of explanation is crucial, detailing the timeline of events, providing evidence, and demonstrating that the issue has been resolved and the applicant is now financially stable.

Take the 30 second mortgage quiz to see if you qualify

If you’re a veteran or an active-duty service member looking to secure a VA home loan, you might be concerned about past financial challenges impacting your eligibility. Life can throw unexpected curveballs, and sometimes these lead to financial setbacks like bankruptcy or foreclosure. Fortunately, the VA home loan program understands that not all financial difficulties are within your control. This is where extenuating circumstances come into play.

Understanding Extenuating Circumstances

The VA home loan is extremely flexible because it allows lenders to consider extenuating circumstances and use common sense when making an underwriting decision. 

These standards are outlined in Chapter 4 of the VA Handbook.

Some examples of allowable extenuating circumstances include:

  • Medical Emergencies: Serious illness or injury leading to substantial medical debt.
  • Job Loss: Unemployment or significant reduction in income due to layoffs.
  • Death of a Spouse: Loss of a primary income earner in the household.
  • Inability To Sell A Home: Inability to sell your departing residence or loss due to declining property value.

How Extenuating Circumstances Affect VA Home Loans

If you have bad credit and recent delinquency, it can be very hard to get approved for a VA home loan. On a manual underwrite, lenders will require that you have no delinquencies that have occurred in the past year.

However, if you have extenuating circumstances, recent delinquencies are allowed as long as the cause of the delinquency has been resolved.

Reduced Waiting Periods For Chapter 7 Bankruptcy and Foreclosure

Standard VA guidelines state that there is a two year waiting period after a Chapter 7 bankruptcy, foreclosure, or short sale.

This waiting period is reduced to only one year if there are extenuating circumstances that caused the bankruptcy or foreclosure to occur.

Take the 30 second mortgage quiz to see if you qualify

Documenting Extenuating Circumstances

To benefit from reduced waiting periods, you’ll need to provide thorough documentation to support your claim of extenuating circumstances. This documentation should clearly demonstrate the event’s impact on your finances and show that it was beyond your control.

Examples of Acceptable Documentation

  • Medical Records: Bills, reports, or statements from healthcare providers.
  • Job Loss Evidence: Severance papers, layoff notices, or unemployment benefits documentation.
  • Death Certificates: In the case of the death of a spouse.
  • Closing Disclosure: In a real estate loss situation

Take the 30 second mortgage quiz to see if you qualify

Manual Underwriting and VA Loans

If your situation is unique or complex, your lender might use manual underwriting. This process involves a more detailed review of your financial situation and the extenuating circumstances affecting it.

Benefits of Manual Underwriting:

  • Personalized Review: Lenders can take a closer look at your specific situation.
  • Flexibility: More room for consideration of unique circumstances that automated systems might overlook.

Case Studies and Examples

Consider the case of John, a veteran who faced significant medical bills after a serious accident. Despite a bankruptcy on his record, John provided detailed medical records and a letter from his doctor. With this documentation, his lender was able to reduce the waiting period for his VA loan, allowing him to purchase a home sooner than expected.

Take the 30 second mortgage quiz to see if you qualify

Licensing Info

I can originate VA mortgage loans anywhere that I’m licensed.

I’m licensed in Alabama, Arkansas, Arizona, California, Florida, Georgia, Illinois, Indiana, Kentucky, Louisiana, Michigan, Missouri, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, and Washington.

Additionally, our team can originate mortgages in several additional states through our corporate referral program.

Conclusion

Understanding and documenting extenuating circumstances can significantly impact your ability to secure a VA home loan. By providing thorough documentation and working closely with your lender, you can overcome past financial challenges and achieve your dream of homeownership. Remember, the VA home loan program is designed to support veterans and service members, recognizing the unique challenges you may face.

For more information, click here to contact me.

Related Post

How To Get A VA Home Loan With Bad Credit

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Carlos Scarpero

Carlos Scarpero is the founder of Scarpero.com and a mortgage loan officer focusing on VA and Non QM mortgage loans. He is also the author of VA Loans Made Easy.
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