VA Loan Prequalification

For many Veterans and service members, the VA loan is a great path to homeownership, offering advantageous terms and financial benefits not readily available through conventional mortgages.

One essential step in the VA loan process is prequalification. But what exactly does it mean to prequalify, and why is it a crucial step for those interested in leveraging the benefits of a VA loan? Let’s take a closer look at how to prequalify for a VA loan.

Prequalification Credit Check

With your permission, lenders conduct what’s known as a “hard inquiry” to obtain your current credit scores. A hard credit inquiry can ding your credit score, although it’s typically only a few points, if any. When you’re shopping for a mortgage, the credit bureaus won’t count every hard inquiry against you. Instead, they’ll typically consider all lender inquiries within a 45-day period as one single check, which minimizes any harm to your credit and allows you to comparison shop.

The VA doesn’t have a built-in credit score to qualify for this program. But it’s important to remember the VA doesn’t make home loans. Instead, it basically provides a form of insurance on behalf of qualified borrowers. It’s ultimately up to lenders, like Veterans United, to decide whether to make a home loan.

Because lenders take on most of the risk with each loan, they’re allowed to introduce requirements and standards that go beyond what the VA wants to see. You’ll often hear these additional requirements called “overlays.” A credit score cutoff is among the most common.

Different lenders can have different credit score requirements. You may also need a higher score if you’ve experienced a recent bankruptcy or foreclosure or if you’re seeking a jumbo loan. Generally, a 620 FICO score is a pretty good barometer for VA lenders.

In addition, any co-borrowers on the loan would also need to meet the lender’s credit score requirement.

If you’re purchasing in one of the nation’s nine community property states, lenders can consider your spouse’s credit and debts even if he or she won’t be on the loan.

VA Prequalification Process

Along with checking your credit, lenders will also seek to learn more about your employment, your income and your overall financial and homebuying goals.

Different lenders may take different approaches to the prequalification conversation. But it’s common for loan originators to ask you about:

• Your desired loan amount
• Your current and previous employment
• Your gross (pre-tax) monthly income
• Your assets, like bank accounts and retirement funds
• Your monthly liabilities (day-care costs, child support, alimony, etc.)
• Any previous bankruptcies, foreclosures or judgments
• Any delinquencies or defaults on federal debts
• Whether you’ve recently owned a home

Lenders will also get a good look at your major monthly debts from your credit report. They’ll use those and the income information you provide to calculate an initial debt-to-income (DTI) ratio. For VA loans, this key mortgage industry metric looks at your monthly debts in relation to your overall monthly income.

They’ll calculate this figure based in part on the loan amount you’re seeking. And that means flexibility can be important for prospective borrowers whose DTI ratio is on the edge. Depending on the lender’s requirements and your unique situation, you may need to seek a lower loan amount to get a workable DTI ratio.

The VA typically wants to see a DTI ratio of 41 percent or less. But it’s possible to go above that and still secure financing. Lenders will usually have their own maximum allowable DTI ratio. Low credit and high DTI ratio are two of the most common reasons why some prospective buyers are unable to get prequalified.

If Your Credit Scores Fall Short

So, what happens if you don’t meet a lender’s credit score cutoff? While some lenders may allow for compensating factors, others might simply send you packing if you fail to meet their credit score requirements. Veterans United takes a different approach.

We created an entire department dedicated to helping service members, Veterans and military families improve their credit and get on the path to loan prequalification.

If we're not able to prequalify borrowers, they have the opportunity to work with the credit experts in our Lighthouse Program®.

Our Lighthouse Program® consultants:

• Identify and help you correct errors on your credit report
• Establish a plan to strengthen your overall financial profile
• Develop personalized objectives to reduce debt

This is a free service open only to Veterans, service members and military families. The Lighthouse Program® has helped more than 30,000 Veterans and service members overcome their credit challenges and go on to close on a home loan.