7. Credit History, Continued
Adverse Data
Reestablished Credit: 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 the
last derogatory credit item was satisfied. For 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.
Collections: Isolated collection accounts do not necessarily have to be paid
off as a condition for loan approval. For example, a credit report may show
numerous satisfactory accounts and one or two unpaid medical (or other)
collections. In such instances, while it would be preferable to have
collections paid, it would not necessarily be a requirement for loan approval.
However, collection accounts must be considered part of the borrower’s
overall credit history and unpaid collection accounts should be considered
open, recent credit. Borrowers with a history of collection accounts should
have reestablished satisfactory credit (see previous paragraph) in order to be
considered a satisfactory credit risk.
Disputed Accounts: 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 judgment by a court must either be
paid in full or subject to a repayment plan with a history of timely payments.
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.
Summary: The above guidance is not meant to address every possible
scenario. Lenders should carefully review the complete credit history and use
their judgment. For example, if an applicant has numerous unpaid collections
– no matter when they were established – it’s not unreasonable to question the
borrower’s ability and willingness to honor obligations. If the applicant
and/or spouse are determined satisfactory credit risks in spite of derogatory
credit information, the loan file should include an explanation from the
applicant(s) and the lender’s underwriter of the basis for the determination. If
lenders are unsure about a particular situation, they should contact the
appropriate VA Regional Loan Center.