Qualifying for VA Loans With Income and Credit
Qualifying for VA Loans With Income and Credit
Ample income and credit are typically enough to qualify a VA-eligible borrower for purchase of a primary residence with no money down using the VA Home Loan Guaranty Program.
Qualifying guidelines provided by the U.S. Department of Veterans Affairs are followed by VA-approved lenders. Sometimes lenders will have additional qualifying requirements. To determine whether a VA-eligible borrower has the ability to pay back a VA Loan, lenders have underwriters that consider debt-to-income ratios, residual income calculations and FICO scores.
To come up with a borrower’s debt-to-income ratio, an underwriter weighs debt against income. The VA recommends that a borrower’s debt-to-income ratio is less than 41%. The following debts are taken into account when determining debt-to-income ratio:
• car loans
• credit card debt
• student loans
• alimony and child support
• potential monthly mortgage payment
• any other major debts
In addition to debt-to-income ratio, underwriters consider residual income when qualifying veterans for a VA loan. Residual income is simply the cash a borrower has remaining after all his or her monthly debts, taxes and living expenses are paid. As long as there is enough residual income, lenders may consider making VA loans for borrowers with debt-to-income ratio is higher than the VA-recommended 41%.
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Debt-to-income ratio and residual income are only part of the equation when figuring a VA-eligible person’s qualifications for VA loan. VA-approved lenders must know a borrower’s credit rating or FICO score before making a final decision to underwrite a VA loan. The VA has no recommendation for minimum FICO score requirement for the VA home loan program. Therefore, each VA-approved lender sets its own FICO score requirement. A VA borrower’s FICO score must meet the lender requirement, or he or she may need to spend time repairing credit before being considered for a VA loan.
Repairing credit can be well worth the effort when it comes to the benefits of a VA mortgage. Credit counselors may recommend these things to improve credit scores:
• Pay off credit cards
• Get all major debts in good standing
• Do not open new credit accounts
In rare cases, a VA-eligible borrower will have no established credit. Lack of credit does not necessarily rule someone out for a VA mortgage. A VA-eligible borrower with no established credit can show ability and willingness to pay with steady and sufficient income, on-time rent payments, consistently paid utility accounts, and positive balances in checking and savings accounts. Sometimes this is enough for a VA-approved lender to get a big picture of what a borrower’s credit score would be if he or she had one.
VA loans are originated and funded by private lending companies and guaranteed by the U.S. Department of Veterans Affairs. Lenders must ultimately agree to the terms of each loan. To find out more about credit and income qualifying standards for VA mortgages contact a VA Loan professional.
