If you served in the military you have a benefit that not many have taken advantage of. The VA loan helps veterans achieve their goals of homeownership. It’s also easier to qualify for than other loans and it’s possible to buy a home for no money down.
Let’s look into everything you need to know about the VA loan, including VA loan credit requirements and other criteria needed for approval.
What Are the Benefits of a VA Loan?
A VA loan is issued through a lender and guaranteed by the Department of Veterans Affairs. These loans make it easier for veterans and their loved ones to purchase or refinance a home.
While veterans can certainly choose conventional loans instead, there are many benefits to using the VA loan benefit.
Some of these include:
No Down Payment
Those who use the VA loan don’t have a payment; however, there is a funding fee of 2.3 % of the total amount borrowed. For veterans with a service-connected disability, this fee is waived. This means it’s possible to use a VA loan to purchase a home with no money out of pocket.
Another option is to roll the funding fee into the cost of the loan.
No Private Mortgage Insurance
Private Mortgage Insurance (PMI) is a requirement for most other home loans for those with no down payment. If you don’t pay 20% down you’re required to pay this insurance. This is to protect the lender in the event that you default on the loan.
PMI is not required for VA loans meaning you’ll save thousands over the course of your loan.
Lower Closing Costs
Seeing a trend here? The VA loan helps service members save money while making the biggest purchase of their lives. Not only does it offer the possibility of no money down, but it also lowers your closing costs.
That’s because there’s a limit to how much lenders can charge in VA closing costs. The money you save in closing can be put toward other costs, like furniture shopping or home improvement projects.
Who Is Eligible?
While VA loans are not issued by the Department of Veterans Affairs, they do determine who can qualify for them. Veterans, service members, and surviving spouses are eligible to purchase a home with the VA loan.
To qualify for this loan you must meet the following criteria:
- Have an honorable discharge
- Have served 90 consecutive days during wartime or 180 during peacetime
- 6 years in the reserves or National Guard
- Are the surviving spouse of a service-member who died due to a service-connected disability or in the line of duty
If you meet the criteria above you’ll get your Certificate of Eligibility (COE). This is proof of your eligibility for the VA loan. Your lender can help you get this important document.
You’ll also need to live in the home you’re purchasing, it cannot be an investment property.
VA Loan Credit Requirements
Once you have your COE and know that you are eligible for a VA loan, the next step is to get pre-approved. This starts with your credit score.
Minimum Credit Score Requirements
While the VA does not have a minimum credit score requirement, different lenders have different criteria for approval. Your credit is a key criterion for this approval.
The higher your FICO score, the better your chances of getting the loan. While every lender is different, if you have a credit score of at least 620 or above, you’re on your way toward approval.
Alternative Credit Options
If your score needs some help, some lenders offer a VA manual underwrite that takes other debts into consideration. While a higher score ensures easier qualification, showing alternative credit may be an option for those with limited credit.
This includes items that don’t typically appear on your credit report such as:
- Cell phone
- Auto insurance
- Store accounts
- Rent payments
If you have any of the above and have been paying on time, every time, this could supplement your credit score and help push you toward approval during a manual underwrite.
Additional VA Loan Requirements
It’s important to remember that your credit score gets your foot in the door, but it does not guarantee final approval. Your lender will look at various other aspects to get you approved.
Each lender has its own overlays, but some of the common approval criteria include:
This is a key metric for approval. Your lender will look at how much your debt is in relation to your gross monthly income. Lenders usually want to see a DTI below 41%, depending on your credit rating.
If you have stellar credit you may get away with a higher DTI. Typically, the lower the percentage, the better your chances of getting approved.
One Year of Timely Payments
Potential borrowers with more than one late payment in the previous year will face more hurdles in getting approved. Most lenders will want to see timely payments throughout the past 12 months.
Applicants with multiple late payments and delinquent accounts may be denied.
No Banking Overdrafts
You may think you’re in the clear if you have a good credit history and no current late payments. However, don’t neglect your bank account.
Before you apply for your VA loan you’ll need to make sure your finances are in order. This means minimal or no overdrafts on your bank statements. Overdrafts are a sign that you can’t manage your finances and may be a red flag for a lender.
You may make it through preapproval with overdrafts, but your underwriter is sure to notice once they start going through your documentation.
Ensure your journey to VA loan approval doesn’t end here by keeping on top of your finances.
Clear CAIVRS Report
Another aspect of VA loan approval that may surprise some applicants is the Credit Alert Verification Reporting System (CAIVRS) report. CAIVRS reports any federal loans that you defaulted on, like student loans.
While these won’t show up o your credit report, if you have unpaid federal loans, they will appear in the CAIVRS system. Some lenders may pull this during preapproval but often it doesn’t happen until underwriting.
If you have any unpaid federal debts, pay those off before you start your VA loan process.
Start Your VA Loan Application Today
Now that you know what criteria is needed to get approved, including VA loan credit requirements, it’s time to get started. Remember that your credit score is only a foot in the door.
Ensure that your bank account is healthy, you have no delinquent federal debts and have made timely payments for the past year. Doing so will help make the process easier on you, and help get you into the home of your dreams.
We can help you on your path toward homeownership. Get in touch with us today and let’s get started.