Everything You Need to Know
VA loans are much easier to qualify for than conventional loans. In this article we’ll talk about everything you need to know about qualifying for a VA loan, and we’ll try to go a bit of a different direction than other things you may have read about qualifying. We’ll talk about the basic requirements, but we’ll also talk about reasons why those requirements are in place and general principles you can follow to increase your chances of qualifying for a VA loan.
One of the best things about the VA loan program is that there is no minimum credit score that they set in order to qualify. Many lenders do have their own minimum credit score, but there are other lenders (like Low VA Rates, for example) that take applications from borrowers with any credit scores and take a look at their actual credit history to get a better understanding of the borrower. The VA generally wants the borrower’s debt-to-income ratio to be below 41%, but there are also compensating factors that can allow for higher DTIs. The requirements for employment history and verifiable income are similar to a conventional loan but also more relaxed and easier to fulfill in nature. If you want to find out for sure whether you are qualified for a VA loan, start the application process on our website, or give us a call to get started. The VA allows lenders the flexibility to make subjective determinations on whether a borrower is a good risk.
The Reasons Why
The biggest reason why the VA’s requirements are the way they are is because they want the VA loan program to be available to as many eligible veterans as possible. The VA can’t make every veteran have great credit scores, but they can empower the lender to use their own judgment to decide whether a borrower is a good credit risk. The purpose of the VA loan program is to help veterans obtain suitable housing at better terms than they could otherwise receive, and the easier the qualification requirements are to meet, the more veterans they can provide that service for. These more relaxed requirements are possible due to a combination of factors. First, the lender still needs to make sure that the loan package is attractive to buyers (not homebuyers, but mortgage investors – entities who buy mortgages to collect on the interest), so the lender is still going to be bound by practical market restraints. Second, the VA offers lenders the VA guarantee, which mitigates the risk that the lender is taking on, which opens the doors for borrowers whom many lenders would consider high-risk. Third, the VA charges the borrower a very reasonable Funding Fee to offset the cost of those few veterans who do require the VA to pay out to the lender. Since fewer borrowers default than don’t, the result of this system is a fairly balanced and sustainable way of making VA loans available to more borrowers.
The first thing is to start taking a look at your credit history long before you apply for a mortgage. Fix the things you can fix, and don’t sweat the things that were out of your control (such as a job loss during the recession or an underwater mortgage). Be open and honest with your lender when you do apply for a loan and don’t try to hide anything. Loan officers in the VA loan program have a fair amount of weight in the decision-making of whether you’re a good risk, and if the lender feels like you will always be open about the less-than-perfect things going on financially, they won’t worry that the first time they hear about a financial problem is when you miss a payment on your mortgage. Going along with that, when you get approved for a mortgage, and if you run into financial difficulty where you may not be able to make your mortgage payment, one of the first people to find out should be your current loan servicer, because the earlier they are aware of the situation, the more willing they will be to offer some form of forbearance and help you to get through the situation without losing your house.