This is a Colorado Springs VA loan story most lenders will not tell. A 100% service-connected disabled veteran with full VA entitlement and a $600,000+ new construction home under contract was about to lose her house — and the mortgage tied to it. After a year of life events that wrecked her credit and pulled her FICO to 517, the $4,100 monthly payment we were lining up would have set her up to fail. So I told her no. That is the part most loan officers skip.
This morning we closed her on a different home with the same builder. Same square footage. About $100,000 less in purchase price. Her new VA loan, with manual underwriting, a 100% VA disability funding fee waiver, the sale of her old house, and a builder credit directed at debt payoff and a rate buydown, put her into a stronger financial position than she had before — roughly $400 less in monthly outflow than where she sat at the start of the year. Below: what happened, why I refused to write the first loan, and how we restructured the second.
The Setup: A Year of Loss, a New Build, and a 517 Credit Score
Here is the actual situation, anonymized:
- The buyer is a Colorado Springs veteran with a 100% service-connected VA disability rating.
- January 2025 — She and her husband went under contract on a $600,000+ new construction build.
- Early 2025 — Family money was already flowing overseas for an older brother’s serious illness.
- Spring 2025 — Her husband was out of work for about six weeks between jobs.
- April 2025 — Her older brother passed away after a long illness. Days later she suffered a pregnancy loss.
- 2025 — Her adult son moved out, ending a $500-per-month household contribution.
- 2025 — Her parents, who had been contributing $450 a month, dropped to under $200.
- August 2025 — She paid roughly $2,000 in flights to pick up her younger son under a court-ordered international custody agreement.
- Fall 2025 — Credit card minimums started slipping. One account went 30 days late. Another eventually charged off. Her FICO dropped to 517.
- Spring 2026 — At loan review for the new build, the file no longer worked at the payment we needed to lock.
On paper, this looked like a credit problem. It was not. This was a year of grief and forced choices that crushed a household budget that had been clean for years. Her credit history before 2025 had no late payments at all. The 517 score did not describe who she was. It described nine months of a brutal year.
Why the Original $600K Build Did Not Work
The new build’s projected payment, with taxes and insurance, came in at about $4,115 a month. Her current obligations — old mortgage plus consumer debt — added up to about $3,522 a month. Even if every credit card was paid off at closing, her new monthly housing expense would be higher than what she had been struggling to cover for the past nine months. More house also means more utility cost, more upkeep, and more of every line item that follows.
VA underwriting can absolutely approve a borrower with a 517 credit score and recent late payments. PRMG runs VA loans without a minimum credit score overlay, and the VA Lenders Handbook gives the underwriter room to weigh extenuating circumstances, residual income, and the full picture. The question here was never whether VA would let us close. The question was whether closing was the right thing to do for this family.
The hard rule that gets ignored.
A pre-approval is not a green light to push the limit of what a borrower can carry. Some loans should not be written even when they technically qualify. That is a loan officer decision, not an underwriter decision. My job is to help a veteran land in a better financial place than where she started — not to push a number through because she wants the house.
The Fix: Same Square Footage, $100K Less, Manual Underwrite at a 517 Score
We restarted the file around a different home with the same builder. A VA loan made the math work because it allowed zero down on the new home, supported manual underwriting for a 517 credit score file, and let the builder direct an incentive into the parts of the deal that actually moved her monthly picture: debt payoff at closing and a rate buydown.
She also sold her existing house. The net proceeds, combined with the builder credit, cleared out her consumer debt at the closing table. Her new mortgage payment lands about $500 higher than her old mortgage payment alone — but with no credit card payments left in the picture, her total monthly outflow drops by about $400 compared to where she was before.
What the restructure required
Documented Life Events
A signed letter of explanation, plus supporting paper — a death certificate, medical records, flight receipts, proof of money sent overseas for her brother’s care, and the lease showing the prior marital separation period.
Past-Due Account Brought Current
The 30-day past-due credit card was paid current the day before our second loan review call. The underwriter saw stabilization in real time, not a promise.
Charged-Off Card on a Payment Plan
The card that had charged off was placed on an automated monthly payment plan, with the first payment in motion before we resubmitted the file.
Same Square Footage, Lower Price
A different floor plan with the same builder — same usable space, about $100,000 less in purchase price. She did not lose the home she wanted. She lost the price tag she could not safely carry.
Builder Incentive Pointed at the Math
Instead of cosmetic upgrades, the builder incentive was split between paying off her remaining consumer debt at closing and buying down her interest rate. Both uses are allowed under VA seller concession rules.
Sale Proceeds Used for Cleanup
Net proceeds from the sale of her prior residence cleared remaining consumer debt and covered closing costs, leaving her with a clean monthly picture going into the new loan.
VA program rules referenced in this post are drawn from the VA Lenders Handbook (Pamphlet 26-7), Chapter 4 (credit underwriting) and Chapter 8 (seller concessions, 4% concession cap). PRMG follows VA program rules without an overlay on minimum credit score.
What the 100% VA disability rating did for this file.
Three things, each of them material:
- VA funding fee waived entirely. Any veteran receiving VA disability compensation is exempt from the funding fee. On a new construction VA purchase this is a 2.15% to 3.3% reduction in the loan amount or refund at closing.
- Non-taxable disability income grossed up for qualifying. VA-rated disability income is non-taxable, so it gets grossed up by 125% for ratio analysis on most VA files. That lifts the qualifying number meaningfully.
- Counts toward residual income. VA residual income — the dollars left in the pocket after every fixed monthly expense — was a key compensating factor on this file. The disability payment carried the residual number well above the West region threshold for her family size.
How We Closed This Colorado Springs VA Loan in Weeks
Speed and structure had to ride together. The original loan had been worked for months. We did not have time to start from a cold file. We had to triage the credit, restructure the house, and document a full year of life events on a calendar driving toward today’s closing.
Tie every late payment to a documented event.
For each delinquent month on her credit report, we matched the missed payment to the life event that caused it — her brother’s illness and death, the pregnancy loss, her husband’s job gap, the cost of international custody travel. Each event had paper behind it. Nothing was an unsupported letter of explanation.
Stabilize active accounts and set up plans on the rest.
The past-due card was brought current. The charged-off card was placed on an automated payment plan. The story underwriting saw was not chaos. It was stabilization — past-tense problems being resolved while the file was in motion.
Match the same square footage to a lower price point.
We worked with the builder to find a floor plan with the same usable space at roughly $100,000 less. The buyer kept what she actually wanted — the size, the builder, the Colorado Springs neighborhood — and shed the price tag her budget could not safely carry.
Direct the builder concessions where they move the file.
The builder incentive was split between paying off her remaining consumer debt at closing and buying down her interest rate — both allowed under VA’s 4% seller concession cap. Sale proceeds from her old house finished cleaning up the rest. The combined effect dropped her total monthly outflow below where she had been a year earlier.
The Honest Tradeoff: $500 Higher Mortgage, $400 Lower Total Outflow
Her new mortgage payment is about $500 higher than her old one in isolation. That number alone makes the deal look worse. It is not. The right comparison is total monthly outflow — mortgage plus every consumer debt payment she had been struggling to keep current. On that measure, her new monthly obligation runs about $400 below where she sat a year ago. She has no consumer credit cards left in payment status, an automated payoff plan running quietly in the background, the VA funding fee saved at closing, and a home that matches her income.
VA loans built around residual income are forgiving when the structure is right. They are unforgiving when a loan officer pushes a number through because the borrower wants the house. The 517 was never the obstacle. The wrong house was.
Frequently Asked Questions
Can you get a VA loan with a 500 credit score?
Yes, in many cases. VA does not set a minimum credit score at the program level — lender overlays determine the floor. Lenders that operate VA loans without a minimum credit score overlay, like PRMG, routinely underwrite VA files in the low 500s, including the case described in this post, which closed at a 517 score. The underwriting question is not the score itself. It is the full picture of why the score got there and what has changed since.
What credit score is needed for a VA loan if I have late payments?
There is no credit score floor for a VA loan at the program level. Late payments on the report affect approval through documentation, not through the score. Recent late payments within the last 12 months generally require documented extenuating circumstances. Older lates usually need only a written explanation. The lender’s overlay — or lack of one — is what determines whether your specific score is eligible at that lender.
What qualifies as extenuating circumstances for a VA loan application?
VA defines extenuating circumstances as events outside the borrower’s control that caused a temporary disruption in their finances. Common examples include the death or serious illness of an immediate family member, divorce or separation, job loss, major medical expense, or a temporary income reduction. Each event needs supporting documentation — death certificates, medical records, separation paperwork, or employment records — not just an explanation in a letter.
How much seller concessions are allowed on a VA loan?
A seller — or a builder, on a new construction file — can pay up to 4% of the home’s value in seller concessions on a VA loan. Concessions include buying down the interest rate with discount points, paying off a borrower’s debts at closing, paying the VA funding fee, or prepaying taxes or insurance beyond 12 months. Customary closing costs paid by the seller do not count against the 4% cap. The 4% cap is set in the VA Lenders Handbook, Chapter 8.
How do I qualify for a VA mortgage with a 100 percent disability rating?
A 100% VA disability rating unlocks three significant qualifying advantages. The VA funding fee is waived entirely — a savings of 2.15% to 3.3% of the loan amount depending on prior VA use. Non-taxable disability income can be grossed up by 125% for qualifying ratios on most VA files. And the disability payment counts toward VA residual income, which is a primary underwriting metric. Qualifying is otherwise the same — credit, income, asset documentation, and a Certificate of Eligibility from the VA.
What are the eligibility requirements for a VA loan in Colorado Springs?
VA loan eligibility in Colorado Springs follows the same VA program rules as anywhere else: a Certificate of Eligibility (COE), sufficient entitlement, owner-occupancy intent, and underwriting approval based on credit, income, and residual income. Colorado Springs is a federal entitlement-eligible market with no county-specific VA loan limits for borrowers with full entitlement. Local lender overlays vary — work with a lender that operates VA loans without a minimum credit score overlay if your file is non-standard.
How much house can I afford with a VA loan?
Affordability on a VA loan is not the same as the maximum loan amount the underwriter will approve. VA underwriting uses two filters — a debt-to-income ratio cap and a residual income floor that varies by family size and region. The right number to look at is total monthly outflow — mortgage plus taxes, insurance, utilities, and any consumer debt — measured against your take-home income and life cushion. The maximum loan you qualify for is rarely the right loan to take.
How do I get the VA funding fee waived with a disability rating?
The VA funding fee is automatically waived for any veteran receiving VA disability compensation, regardless of disability percentage. To apply the exemption, the lender pulls your Certificate of Eligibility (COE), which lists your funding fee exemption status. If your COE has not been updated to reflect a new disability rating, the VA can update it through the lender’s Web LGY portal. The funding fee is then removed from the loan amount, or refunded at closing if it was prepaid.
More on VA Loans, Manual Underwriting, and Credit Recovery
VA Home Loans Hub
Manual underwriting, no minimum credit score overlay, residual income approach to VA financing.
VA Loan Denied After Pre-Approval
Another file where the original lender walked away over recent late payments. How we restructured it through manual underwriting.
All Loan Options
The full product lineup — VA, FHA, USDA, Conventional, Non-QM, DSCR, bank statement, HELOC, construction.
Recent Approvals
Real-world VA, FHA, Non-QM, and HELOC closings — including more case files like this one.
Written by J.D. Peck.
Area Manager and Mortgage Loan Originator with The JD.Mortgage Team at Paramount Residential Mortgage Group (NMLS #75243). NMLS #314883. Based in Colorado Springs, Colorado. 25+ years of mortgage experience, 3,100+ loans closed, Scotsman Guide Top Originator 2026. Lending in 49 states. Published May 29, 2026.