Qualifying for a VA Loan

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.

 

The Qualifications

How to be QualifiedOne 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.

 

Principles You Can FollowPrinciples to Follow

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.

 

VA vs. Conventional: Loan Qualifying

Loan Qualifications

The VA loan program is pretty awesome, but many VA-eligible borrowers don’t understand what makes it so great and underestimate its value. We are going to do a head-to-head comparison in this article to compare the VA loan program and the conventional loan program and their relative qualification requirements. There are three aspects to loan qualification that we’re going to cover: credit score, income requirements, and employment history. You’ll find that while many of the qualification requirements are generally the same, lender discretion is allowed in far more cases than with conventional loans.

 

Credit Score Requirements

The VA Lender’s Handbook does not specify a minimum credit score requirement for a borrower to be approved for a VA loan. They do, however, require that the lender make sure the borrower has “satisfactory” credit for the loan they are applying for. Most lenders interpret this to mean a minimum credit score of 620. Many lenders, however, will go as low as 580. The great thing about the VA loan program, however, is that it allows lenders to use their discretion when analyzing a borrower’s credit report to see exactly why their score is so low and see whether they can still consider the borrower an acceptable credit risk. To get a conventional loan, you’ll definitely need a minimum of 620, and at least 740 to avoid extra fees and headaches. VA wins this match-up with no problem.

 

Income Requirements

Income and employment are often blurred because they are interconnected. To differentiate this section from the one that follows, this paragraph will be talking about debt-to-income ratios, while the next paragraph will be talking about employment history. The maximum debt-to-income ratio (DTI) on both a VA loan and a conventional loan is 41%. However, just like with credit score, a VA lender has the discretion to approve a loan with a DTI higher than 41%, they simply have to provide an explanation in the loan documentation when the send it to the VA. The loan can still be processed and closed without VA’s prior approval, and simply needs to have an explanation as to why it was approved even though the DTI was higher than 41%. While this match-up is closer than the first one, VA still has the advantage.

 

Employment History

There’s a lot to analyze here: full-time work, part-time work, currently verifiable income, past employment history, second-jobs, self-employment income, etc. For the most part, however, the VA loan program and conventional have virtually identical requirements. Both require 2 years of unbroken employment history and require you to have worked at your current job for 30 days if it’s full-time, and 2 years if it’s part-time, self-employment, or similarly un-guaranteed work. The only real flexibility the VA offers here that conventional does not is the documentation they allow to be used to verify the employment, which is not a huge advantage. This match-up is more of a draw, but that still means that VA is the overall winner by a two out of three points.

 

The Why and HowGet Approved Today

So why is the VA loan program better than conventional? Because the VA loan program is set up to be a benefit to those who have served in the military. Conventional is just the process by which you buy a house, and the VA loan program is designed to be a way to make that process easier, faster, and cheaper, as well as make it easier for you to get the house you want on better terms. How do you get a VA loan? That’s pretty easy; you just call us at Low VA Rates using the number on our website or by contacting us via chat and tell us what you’re looking for. We’ll answer your questions and get you the best loan option that will work for you.

 

Being easier to qualify for isn’t the only benefit of the VA loan program. You’ll also enjoy lower interest rates, better refinance options, and built-in protections on ARMs and in the event that the market dips that conventional loans simply can’t offer. We’ll keep publishing more articles comparing the VA loan program to the conventional loan program to show you the differences.

 

Why Should I Pre-Qualify For my VA Loan?

How Pre-Qualifying can help the VA Loan Process

 

VA Pre-Qualification ProcessPre-qualifying is actually a really good idea. Unfortunately, it has a bad connotation because of all that spam you get from credit card companies saying you’re “pre-qualified” for a credit card. When it comes to mortgages, though, particularly a VA loan, it is really smart to pre-qualify. Why? We’ll talk about a lot of reasons and we’ll divide them into things that are general to just about any home mortgage and things that are specific to a VA loan.

 

General Reasons that Apply to All Home Mortgages

The first and probably most obvious reason to pre-qualify is because that’s the only way you can find out how large of a loan you’ll be approved for. You don’t want to waste time shopping for a $300k+ home when you won’t qualify for more than $275k. Pre-qualifying takes all the guesswork out of it, and it becomes less a question of trying really hard to qualify for a specific amount and more a question of finding a home that you can easily afford. That’s only the tip of the iceberg, however, pre-qualifying also greatly reduces the amount of time it takes to close on a loan, because a lot of the work has already been done. You can start the pre-qualifying process and house-hunt in the area you want to move even before you’ve been pre-qualified. Being pre-qualified also opens you up to purchase foreclosed homes for very competitive prices. Especially for homes that are in high-demand areas and in great condition, being pre-qualified is the only way you’ll have a chance of nabbing the property before someone else beats you to it. Banks are interested in closing on foreclosures as quickly as possible, and they are not interested in a long, drawn-out loan application process that might end in rejection because the borrower is not qualified for the loan amount.

 

Being pre-qualified can have the same effect on normal home sales as well. Often, home sellers are in a hurry to sell their home, whether because they don’t want to keep paying interest on a home they are moving out of or because they are relocating to pursue a career opportunity elsewhere, time is often of the essence, and your offer may be passed on in favor of a lower offer of someone who is pre-qualified because the seller knows A) the pre-qualified buyer is definitely eligible for the loan amount and B) they’ll be able to close a lot faster. Pre-qualifying on any mortgage is definitely a good idea.

 

Reasons Specific to (or Especially True For) VA LoansGetting Loan Pre-Approval

All the reasons explained above are true across the board, but many of them are especially true of VA loans. For example, many home sellers are turned off by the Escape Clause, which allows borrowers to get out of a contract to purchase a home if the appraisal value comes in lower than the sale price of the home. While pre-qualifying does not cancel out the Escape Clause, it makes it less likely to become a problem, because the borrower has certified that they can afford the home they are looking at, which means they are much more likely to have enough money to make a sufficient down payment to bring the loan amount down to what the VA will guarantee even if the seller is not willing to drop the price of the home. Many sellers also avoid VA borrowers because of how long it can take to close on a VA loan. Being pre-qualified can mitigate that significantly, and open a lot of doors that may not otherwise be open.

 

Also, for a VA borrower, your relationship with your lender is very important, because VA-approved lenders have a certain amount of leeway to offer VA loans the way they see fit, and if you establish a relationship with a certain lender (or several lenders) by pre-qualifying with them, you get an in-depth opportunity to evaluate them and decide which lender you want to continue working with to actually get your loan. You can also see the differences in the amounts that each lender will pre-qualify you to borrower, which is a useful tool in comparing different VA lenders. Contact us today and we can help you begin the process.

 

Historically Never a Better Time for a VA Home Loan

Let me take you back 60 years—that would have been 1963. In 1963 interest rates for a 30-year fixed home loan dropped below 6 percent. For approximately 40 years—between 1965 and 2005—interest rates stayed above that 6 percent mark, often several points above that mark.

There is no way to know if history will repeat itself, but it is a fair question to ask: if we were to go another 40 years before interest rates returned to the present historic lows, where would YOU be and would you be in a better position to take advantage of that opportunity?

There is no time like the present!

You have many different loan options right now for a VA home mortgage. You can get a fixed loan, an adjustable rate mortgage (ARM), or a refinance—all at historic lows. Just how good is the current VA interest rate? As I said earlier: you may not have a better opportunity for a veteran mortgage loan in your lifetime.

The timing is absolutely wonderful for a VA loan. I’d like to offer some advice, because almost everyone needs a lender to get into a home and everything in the lending industry is about risk assessment.

There are 3 key elements to any mortgage transaction.

  • Credit. Your credit score and history are the driving factor in this market. You can find out more about your credit (and even download a free credit report) at any of the “Big Three” credit bureaus’ websites:
    • Experian
    • Equifax
    • TransUnion
  • Debt to Income (DTI). This ratio determines how much of a payment you can afford under lending guidelines. The baseline for DTI is usually around 41%. (Calculate the money you spend on house maintenance, tax, insurance premiums, car loans, credit card bills, educational loans, etc. Then, calculate the amount you earn every month. Finally, calculate your debt-to-income ratio by dividing the first number by the second number.)
  • Loan to Value (LTV). This ratio determines how much you borrow against the value of the property. VA loan requirements allow for LTV & CLTV on purchases and IRRRL’s to 100%. The LTV & CLTV on cash-out refinances are allowed up to 90% of appraised value.

Additional Guidelines

A VA mortgage loan requires a certificate of eligibility (COE).  Getting help to apply for your COE (and get your other questions answered) is really pretty simple.

  • Credit Score. The VA insures VA loans and does not require a minimum FICO score. All lenders have their own requirements in addition to those of the VA. Most lenders today require the minimum mid-score in a tri-merge report to be at 620 or better. The credit report must clearly support an applicant’s ability to meet financial obligations in a timely, responsible manner. Lowvarates.com specializes in working with those below that tri-merge number.
  • Established Trade Lines. VA loan requirements allow for both traditional and alternative credit trade lines. However, most lenders require that you must have at least two lines of credit that you have maintained for at least two years.

Late Payments

VA loan requirements does not allow for more than one debt payments being more than 30 days late if the incidents have occurred within the last 12 months. This includes more than one late payment on a single account. In addition, individual lenders may have restrictions on late payments made in the last 12 months. No mortgage late payments made in the last 12 months are allowed on purchase and refinance of VA loan. And only a 1×30 mortgage late payment is allowed on a VA streamline (IRRRL).

Collections

VA loan requirements specify that most collection accounts outstanding must be paid, no matter what their age as long as they are currently delinquent and/or due and payable. 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.

Bankruptcies

Chapter 7 must be discharged for at least 2 years with no late payments since the date of discharge. Applicants who filed for Chapter 13 and have satisfactorily made at least 12 months of payments, and the Trustee or the Bankruptcy Judge approves of the new credit, the lender may give favorable consideration.

Liens

VA loan requirements will not allow for any delinquent federal debt such as student loans or tax liens or other government debt, no matter what their age as long as they are currently delinquent or due.

Foreclosures

VA loan requirements state that an applicant may be eligible if there was no loss of security on a foreclosure or a satisfied judgment that was completed more than 12 months prior to the date of the application. However, if there was loss of security due to a foreclosure, the applicant is ineligible for a VA loan within 36 months after foreclosure.

Child Support

VA loan requirements state that child support in arrears must be brought current. If a payment schedule has been established with the Court for the past due amount and a history of satisfactory payments is provided, the applicant will not be required to pay the past due amount in full. Both the payment for the past due child support and the regular court ordered support payment will be included in the applicant’s income to total debt ratio.

If you are paying court ordered child support, it is considered a liability payment (even though it may not show up on your credit report or your pay stubs as wage garnishment); it counts against your debt ratio (DTI). Receiving court ordered child support is considered a source of income.

Down Payment

VA loan requirements for a home purchase do not have a minimum down payment. The VA loan is one of the very few loans that can be financed to 100% with $0 down payment.

If you think about it for a minute, the current lending climate is one of the truly unique opportunities of our times. It won’t take long to contact lowvarates.com and get your questions answered as you start the ball rolling toward home ownership.

Get Started With Your VA Loan Today

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