VA Loan Qualifying 101

What do lenders look for? Read on to find out.

Basic VA Loan Qualifying Requirements

Veterans often ask about what is needed to qualify for a VA loan. Two important factors include your income and credit. So that begs the question: Who’s actually qualified?

VA home loans are originated by VA-approved lenders. By law, the VA can back (or guarantee) a loan only if the Veteran is a satisfactory credit risk and has the ability to repay the loan. Since lenders fund the loans, the VA gives lenders some flexibility in deciding who qualifies. That’s why income and credit requirements for VA loans can vary from lender to lender. Let’s take a look at what credit factors your lender will look at for approval.

When Will the Lender Pull My Credit?

One of the first things your lender may want to get a look at is your credit. Early on in your loan process, we do what’s called a “soft pull” of your credit. This will give your potential loan team an idea of your credit history. A soft pull doesn’t affect your credit score because, in this prescreening stage, the inquiry isn’t associated with an actual application.

If your credit looks okay after a soft pull, your lender may prequalify you and invite you to apply for a loan. A hard pull credit check is done by the lender after your application is official. A hard credit inquiry can affect your score because it is associated with your loan application. That’s why the CFPB says it’s important to wait to apply for any other new credit until you’ve closed on your VA loan.

Credit Requirements and Minimum Credit Score

In general, a lower credit score is associated with a higher risk of borrower default. Since the lender is taking on most of the risk for the loan, it sets its own credit score minimums. Minimum credit score requirements for VA loans vary by lender, and can change from time to time, based on the lending market. Historically, the minimum credit score for most VA lenders tends to be competitive across the board.

But what if your credit score is lower than the minimum required by your lender? It’s not necessarily the end of your loan journey. A qualified loan professional can go over your credit report with you and point you to tools and resources from credit authorities such as the Federal Trade Commission (FTC) to help you improve your credit.

Enough Residual Income To Pay Obligations

Qualifying isn’t just about your credit score. Your loan officer will also examine your income, total debt, and debt-to-income (DTI) ratio. All of this information is required to prove you have the ability to repay your loan and that you have sufficient residual income (money left over after monthly obligations) to maintain a certain quality of life. In other words, the VA sets guidelines intended to ensure that you can pay your mortgage and at the same time pay for other basic living expenses.

The lender will check to see if you have enough residual income based on VA guidelines. The VA provides lenders with a residual income table categorized by region and family size.

A Debt-to-Income Ratio of 41% or Lower

Another qualifying factor your lender will examine is your debt-to-income (DTI) ratio. You’ll need a DTI ratio that meets the VA’s and your lender’s requirements for VA loan approval. DTI is a simple comparison of your monthly debt to your gross monthly income. The VA gives approved lenders a DTI standard of 41% as a ceiling. But the VA also allows some flexibility for borrowers who have compensating factors that can make up for a higher DTI.

Here is the list of potential compensating factors from the VA Lender's Handbook:

  • Excellent credit
  • Conservative use of consumer credit
  • Little or no consumer debt
  • Long-term employment
  • Sizable liquid assets
  • Significant down payment
  • Considerable equity (refinance loans)
  • Little or no increase in shelter expense
  • Military benefits
  • Previous homeownership experience
  • High residual income
  • Low debt-to-income ratio
  • Child care tax credits
  • Homeownership tax benefits

Now that you know some of the credit and income qualifying factors that are considered for a VA loan, you may have a better idea of where you stand. Your loan professional can help you understand how your lender’s credit and income guidelines apply to your individual situation.

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