Need-to-Know Credit Questions VA Lenders Ask
May 4, 2018
For veterans and active duty service members, the VA guaranteed home loan program offers many advantages. These loans have been designed to put home ownership within the range of all those individuals who are now serving their country or have served in the past.
Although some features of VA guaranteed loans are different than conventional loans, such as not requiring a down payment, other features, such as credit considerations are similar to standard mortgage loans.
Credit Score Considerations
Just like traditional home loans, VA guaranteed loans require applicants to provide information about their credit histories. VA mortgages do not require a minimum credit score, nor is a maximum debt ratio to be considered. Instead, the VA encourages lenders to consider the overall lending profile to make decisions about loans.
Although the VA states no maximum amount for a loan, the amount covered under the guarantee is limited. In most parts of the country, loan amounts up to $417,000 do not require a down payment.
What Is Your Credit Score?
Generally, a credit score above 620 is favorable to you. The credit score that consumers see is not the same one that lenders have available. Under lending criteria, you may have a different score, which may not be as favorable to your loan application.
Lenders also must receive scores from two or three different credit agencies, and their choice of score may put you below the minimum 620 number. If you have questions about your credit score, asking for pre-qualification or pre-approval will help you to determine your likelihood of success in securing a VA guaranteed loan.
Do You Have Any Old Collections or Judgments on Your Record?
The VA Lenders Handbook recognizes that old collections or judgments on an applicant’s record can indicate that the individual may be a poor risk for a loan. However, the size of the unpaid amount may have a bearing on whether the lender will approve a loan.
Generally, lenders have a cap on these debts, and if the amount is above their limit, the loan will be denied. If any of the unpaid debt is to the federal government, the loan will be denied. Setting up a payment plan to manage the debt can often satisfy their requirements for approval of a loan.
Do You Have A Bankruptcy or Foreclosure on Your Record?
A bankruptcy or foreclosure will cause the lender to impose a waiting period after the event before considering your application for a home loan. After a foreclosure or short sale, you will be required to wait 24 to 36 months after the completion of the proceeding.
For a Chapter 7 bankruptcy, the waiting period is 24 to 36 months. For a Chapter 11 bankruptcy, the waiting period is 12 to 36 months. The strength of your overall credit will be considered in the amount of time you are required to wait to get a loan.
Is Your Income Stable?
The lender will require you to prove that your current income is stable and sufficient to cover the loan payments on a regular basis. They will calculate your ability to pay the mortgage amount plus ordinary living expenses.
Some types of income will not be considered in regard to home loans for veterans, such as part-time work you have only done for a short period or alimony payments.
The Pros and Cons of VA Loans
April 21, 2018
The Veteran’s Administration guaranteed home loan program has allowed millions of veterans and active duty service members an affordable way to own their own homes.
The program does not provide home loans for veterans. Instead, it guarantees loans given by private lenders.
A look at the pros and cons of the program can help homebuyers determine if a VA guaranteed loan is right for them.
Pros of VA Home Loans
The VA home loan program is popular because it offers homebuyers a number of advantages:
- Little or no down payment is required – Homebuyers can purchase a home sooner because they do not have to save for the large down payment required by lenders offering conventional loans.
- Competitive interest rates – Because the risk for repayment of the loan is covered by the federal government, lenders can offer lower interest rates.
- The purchase price of the home is assured – A VA appraisal ensures that the home is worth the value of the loan.
- Closing costs are limited – The VA program will pay customary closing cost items, but not additional costs.
- No prepayment penalty – Homeowners who then sell their property do not have to pay a penalty for paying off the loan earlier than its term.
- VA loans are assumable – The homeowners can offer the favorable mortgage terms to a subsequent buyer.
- Forbearance for financial difficulties – If the homeowner has a financial setback and cannot make payments, special terms can be negotiated for them.
- Warranty for VA approved construction – The VA will assist in enforcing the builder’s warranty for justifiable construction complaints.
Cons of VA Home Loans
A home loan through the VA program also has a number of disadvantages that homebuyers should take into account:
- VA home loans are for the purchase of primary residences – These loans cannot be used for purchasing investment property or second homes.
- You must pay a VA loan funding fee – The VA imposes a fee on these loans to fund the program. The fee can be rolled into the loan amount. Veterans who have service-related disabilities are exempt from paying this fee. The funding fee increases each time you use the VA home loan funding program.
- Sellers may not agree to a sale with VA loan – A number of misconceptions regarding VA home loans have contributed to seller reluctance to enter the application process. However, sellers may be required to pay some of the closing costs, and this expense may put off some sellers.
- Loan limits and overlays may apply – The VA home loan program does not impose limits on home loans. However, private lenders may have additional requirements, called overlays, in regard to loan amounts. These requirements help to ensure that the lender maintains its favorable record with the VA.
- VA loans do not guarantee construction defects – Approval of the loan neither guarantees that the property is free of defects, nor can it compel the builder to correct any problems with construction. However, it can suspend the builder from the VA program.
- The VA program does not provide for legal services, if necessary – Any legal action against the builder or previous owner is the responsibility of the buyer.