VA home loans are government-backed mortgages. That government backing makes it easier to qualify with FICO scores, employment history, and debt ratios. But even with the government’s guarantee to repay the participating VA lender in case of home loan default, the borrower must still financially qualify for the loan. What do you need to know about being approved for a VA mortgage?
A good portion of that information involves the lender having to find ways to justify approving your loan. If your loan officer’s job depends on making good decisions on who to lend to, the contents of a credit report and employment history become very important.
What Does It Take to Be Approved for a VA Mortgage?
Borrowers should know that unlike some other government-backed mortgage loans such as the FHA Single-Family Home Loan program, VA loan rules do not specify a minimum FICO score. This is up to the participating lender to decide. Not all lenders will offer you the same rates, terms, and fees and not all of them have the same FICO score requirements, either.
VA and FHA loan rules do have similar features in this department; both require that the FICO score and other loan approval standards be “reasonable and customary” for loans similar to it. Your lender may not have specific instructions on FICO score numbers, but a VA loan can’t have an outrageously higher or lower requirement in this area than similar loans that may be conventional, FHA, USDA, etc.
The first thing you will need to do is to compare lenders and see who is most willing to work with you and your FICO scores. If you have had a bankruptcy or foreclosure in your past this becomes even more critical, as some lenders may have more experience dealing with such issues than others. And that experience counts.
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Why does this matter so much? It’s easy to assume that there will be little variation among lenders, but that’s not always true.
You’ll want to know what kind of interest rate your lender will offer based on your FICO scores, and you’ll also want to know a lender’s requirements for loan approval in terms of employment history, debt ratios, and other details.
What does it take to be approved for a VA mortgage loan? You’ll have to qualify with your FICO scores but also with your employment history, debt repayment history, and credit utilization. Here’s where the VA no-money-down home loan gets interesting.
VA loans typically require no down payment. But if you are a borrower who has FICO scores that are lower than the lender’s standards, you could offer to make a down payment as a compensating factor. Depending on circumstances, that may help the lender justify approving the loan.
VA borrowers who make a down payment also get a benefit from a reduced VA loan funding fee, so there’s a financial benefit that goes beyond the lower principal balance you get after putting money down.
Qualifying with Employment and Income
In the paragraphs above we mention that you must qualify for a VA mortgage with credit scores, repayment history, and employment. Some may ask an important question. If the VA loan program is for military people, why is employment verification even needed? Don’t all applicants for the VA loan program have active-duty military jobs?
The short answer is no. Some may be Reservists, some may work for the National Guard, and some may be military retirees or veterans who separated from the military without hitting retirement age. And then there are those who do serve but are junior enlisted and may not earn enough money yet to be able to afford the loan.
All of those circumstances must be taken into account by a participating lender. So yes, employment verification and income verification are both crucial.
Your participating lender may want to see two years of employment history to approve your mortgage loan application. Anything less may require a waiver or a written explanation. In some cases, no exception can be made.
Not all income–including some military benefits–can be counted as verifiable income for the purposes of approving your home loan. For example, your basic military pay and allowances may be considered, because any pay that is “likely to continue” could be considered verifiable.
An annual clothing allowance may be included because it is a recurring payment. A one-time payment of a bonus may not qualify in the same way, and certain types of income (think commissions or money from self-employment) may be counted if there is sufficient history behind the payments.
If you haven’t been paid commission for a full year, you’re likely not going to be allowed to use that income for purposes of loan approval. If you’ve been earning it for more than two years, it may be countable depending on the lender, state law, and other variables. The lender wants to see indications that this income is going to continue into the loan term.
Some Income Just Doesn’t Count
Some income isn’t considered steady or reliable. Selling things on eBay or in an online marketplace, for example. There may be exceptions depending on the nature of your business but if you earn money selling online you will need to have a conversation with the lender about whether your specific business qualifies or not.
Some income cannot be counted even if it comes from a federal agency in the form of a military benefit. For example, the Post-9/11 GI Bill provides a housing stipend for those attending college under the program. The housing payment is equivalent to the monthly housing allowance of an E-5 with dependents.
And it would be very easy to understand how you would want to use that monthly housing allowance to qualify for a home loan. Yet, VA loan rules don’t permit the use of the GI Bill as income. Chapter Four of VA Pamphlet 26-7, the VA Lender’s Handbook, instructs your VA loan officer;
“Do not include temporary income items such as VA educational allowances (including the Post 9/11 GI Bill benefit) and unemployment compensation in effective income.”
You read that correctly, unemployment also cannot be used as income to qualify for a VA mortgage. Why?
The key is the word “temporary”. The GI Bill and unemployment compensation are not “likely to continue” as they have definite expiration dates which vary depending on when you use the benefits. This expiration is what keeps this income from being used to approve your loan. You can still use that income to pay for VA loan expenses like closing costs, but you cannot have it counted toward your “official” annual income for purposes of calculating the debt-to-income ratio.
Loan approval standards will vary depending on the lender and other variables. You’ll want to compare at least three or more lenders together to see who offers you the best deal. Are you worried that getting mortgage rate quotes and other details may affect your credit scores?
It’s true that certain credit inquiries can temporarily lower your credit scores but if you have multiple inquiries due to shopping around for a lender, as long as those are accomplished within a certain window of time (14 days typically but may be longer depending on the credit scoring model) those multiple inquiries will only count as one.
Loan approval depends on a variety of factors and don’t forget that in addition to all of the information above you will need to avoid applying for new credit in the meantime and work on reducing your debt ratio and account balances to get closer to loan approval. It’s not just about what;s already in your credit report, but what could be coming in that report in the days and weeks leading up to loan application time.
>> Interested in a no PMI, zero down payment possible home loan? For a no-obligation, free consultation regarding your VA Loan eligibility, please go here.
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