VA Loans and Your Credit: What You Need to Know
Some who are new to their VA loan benefits might confuse being eligible to apply for a VA mortgage loan with actual approval of the VA loan itself. However, the Department of Veterans Affairs spells out in VA Pamphlet 26-7 what’s expected of VA loan applicants.
According to Chapter Four of VA Pamphlet 26-7, “By law, VA may only guarantee a loan when it is possible to determine that the veteran:
- Is a satisfactory credit risk
- Has present and anticipated income that bears a proper relation to the contemplated terms of repayment.”
That means that the same kind of credit scrutiny is given to borrowers applying for VA loans as with conventional or FHA mortgages.
The same kind of thinking that applies to a conventional mortgage–preparing your credit, having at least a year’s worth of on-time payments and a steady source of income–also apply to VA home loans. When processing VA loan application paperwork, the lender must abide by the rules in Chapter Four, which state, “Identify and verify income available to meet:
- The mortgage payment
- Other shelter expenses
- Debts and obligations
- Family living expenses.”
The lender is also expected to, “Evaluate whether verified income is:
- Stable and reliable,
- Anticipated to continue during the foreseeable future, and sufficient in amount.”
There is no minimum income requirement for VA loans, instead your lender will evaluate your income and compare it to the amount of your current debt, and factor in an estimated monthly mortgage payment. Knowing that the lender must do this as part of the VA loan approval process can shed some light on how to proceed in the year leading up to your VA loan application.
Borrowers should definitely try to reduce the amount of their debt compared to their income, refrain from opening new lines of credit in the year leading up to the home loan application, and make timely payments on their financial obligations.
Your FICO scores are also examined as part of the VA loan approval process. If your scores are marginal–below the 620 range–you may need to take additional time to raise your credit scores before applying for a VA loan unless you have what the VA terms, “compensating factors” working in your favor. A large down payment would be considered one possible compensating factor, as would having “substantial cash reserves”.
Do you have questions about VA home loans? Ask us in the comments section.