How to Analyze Credit

(Lender’s Handbook, Chapter 4, Topic 7c)

The applicant’s past repayment practices on obligations are the best indicator of his or her willingness to repay future obligations. Emphasis should be on the applicant’s overall payment patterns rather than isolated occurrences of unsatisfactory repayment.

ABSENCE OF CREDIT HISTORY

(Lender’s Handbook, Chapter 4, Topic 7c)

For applicants with no established credit history, base the determination on the applicant’s payment record on utilities, rent, automobile insurance, etc. Absence of credit history is not generally considered an adverse factor. It may result when:

• Recently discharged veterans have not had an opportunity to develop a credit history.
• Applicants have routinely used cash rather than credit.
• Applicants have not used credit since some disruptive credit event such as bankruptcy or debt pro-ration through consumer credit counseling.

Note: In these cases, develop evidence of timely payment of non-installment obligations such as rent and utilities since the disruptive credit event. For Bankruptcy cases, see “Bankruptcy” heading.

ADVERSE DATA

(Lender’s Handbook, Chapter 4, Topic 7c)

In circumstances not involving bankruptcy, satisfactory credit is generally considered to be reestablished after the veteran, or veteran and spouse, have made satisfactory payments for 12 months after the date of the last derogatory credit item.

If the applicant and/or spouse are determined to be satisfactory credit risks in spite of derogatory credit information, include an explanation of the basis for the determination. For unpaid debts or debts that have not been paid timely:

• Pay-off of these debts after the acceptability of applicant’s credit is questioned does not alter the unsatisfactory record of payment. Generally, unpaid collections should be considered as open, recent credit.
• Lenders may consider a veteran’s claim of bona fide or legal defenses regarding unpaid debts except when the debt has been reduced to judgment.
• Account balances reduced to a judgment by a court must be either paid in full or subject to repayment plan with a history of timely payments.

Documentation of alternate credit (e.g., utilities, car insurance, etc) should not be used to offset an otherwise unsatisfactory credit history.

BANKRUPTCIES AND PREVIOUS FORECLOSURES

(Lender’s Handbook, Chapter 4, Topics 7e, f)

CHAPTER 7 BANKRUPTCY

Generally, bankruptcies discharged more than 2 years ago may be disregarded. Bankruptcies discharged within the last 1 to 2 years require specific development. Obtain the following:

• Complete copies of all pleadings and discharge of the bankruptcy.
• Evidence that the applicant has a recent history of satisfactory consumer credit (after the bankruptcy).
• Evidence that the bankruptcy was caused by circumstances beyond the applicant’s control.

CHAPTER 13 BANKRUPTCY

The lender must document that the applicant has satisfactorily paid on the plan for at least 12 months and obtain a letter stating that the Trustee or the Bankruptcy Judge approves of the new credit.

FORECLOSURES

A credit history that reflects a foreclosure (or deed-in-lieu of foreclosure) does not in itself disqualify the loan.

• Develop complete information on the facts and circumstances of the foreclosure.
• Apply the guidelines provided for bankruptcies filed under Chapter 7.

If the foreclosure was on a VA guaranteed loan, determine whether or not the veteran has sufficient entitlement available for the new loan.