How to Navigate the VA Loan Preapproval Process

A key  benefit of military service, Veterans Affaris (VA) home loans offer no-down-payment  financing, no private mortgage insurance (PMI), and flexible credit criteria.

But while VA  loans typically employ less-rigorous credit standards, make no mistake: Each  applicant is still subject to a thorough evaluation. That process is known as  pre-approval, and helps lenders assess a potential military buyer’s eligibility  for the VA home loan program.

Pre-qualification  vs. Pre-approval
At the  outset, it’s important to know that pre-qualification does not equal pre-approval. Pre-qualification  can typically be completed over the phone with a lender, and gives potential  borrowers a basic idea of their eligibility and purchase power. 

Pre-approval,  on the other hand, is a much deeper examination of a borrower’s financial  profile. To gain pre-approval, a potential borrower must submit several pieces  of documentation, which may include:

  • Pay  stubs

  • Tax returns

  • Bank  statements

  • Evidence  of real estate assets

Even more  importantly, service members must recognize that pre-approval does not equal a  loan guarantee. Although pre-approval is a thorough and extensive process, it’s  still only a pre-emptive look at a buyer’s eligibility for a loan. Before a  loan can be finalized, the property in question must meet VA appraisal  criteria, and the VA borrower is also subject to a final credit check.

Meeting  the Service Requirement
The service  requirement is often the first determinant of VA loan eligibility. Even those  with perfect credit scores and flawless credit reports can’t be eligible for VA  financing unless they’ve met one of the following service requirements:

  • At  least 90 consecutive days of active duty service during wartime

  • At  least 181 consecutive days of active duty service during peacetime

  • At  least six years in the National Guard or Reserves

  • Some  surviving military spouses are also eligible

Service  members and veterans don’t need to obtain any “proof of service” documentation  prior to speaking with a VA lender. Most VA lenders can access a borrower’s  formal “Certificate of Eligibility” (COE) from an automated system within  minutes.

Assuming a  potential borrower meets the service requirement, lenders move on to the credit  portion of the evaluation. The VA does not enforce a FICO score minimum:  rather, the agency leaves that decision up to individual lenders. Lender credit  guidelines will vary, but a leading VA lender, Veterans United Home Loans, enforces a minimum FICO score of  620.

Debt-to-Income  Ratio
VA lenders  also like to ensure that a borrower’s debt won’t outstrip income. Enter the  debt-to-income (DTI) ratio.
A VA lender  will tally each of an applicant’s “significant” monthly debts. The DTI  evaluation usually only includes debts with an obligation of 10 months or more,  such as housing costs, car loans, student loans or child support. But short-term  obligations are also sometimes included, particularly if they significantly  affect an applicant’s finances.

  The sum of  those significant debts is divided by total monthly income. The resulting DTI  ratio generally needs to equal 41 percent or less to garner VA loan approval.  Those with higher DTI ratios can sometimes qualify for financing, but will need  to meet additional financial criteria.

Residual  Income Requirement
One of the  most unique features of the VA loan pre-approval process is the residual income requirement.  Designed to protect the financial health of VA borrowers, the residual income  requirement ensures veterans have enough monthly cash available after major  expenses to cover household needs like food, health care and gasoline.

The VA  enforces strict residual income guidelines that vary based on region and family  size. For example, a family of five living in the West needs to have $1,158  available monthly after paying the mortgage and other major expenses. Veterans  must meet the residual income requirement to gain pre-approval status.  Otherwise, applicants can try for a lower loan amount.

Those who  fail to meet the DTI ratio of 41 percent must exceed the VA’s residual income  requirement by 20 percent. Using the example above, a Western family of five  with a 43 percent DTI ratio would need $1,390 in available monthly residual  income.

VA lenders  love steady employment and consistent paychecks. The ideal VA loan candidate  has a minimum of two years of full-time employment with the same employer.

That’s not  to say it’s impossible for veterans with less-perfect job histories to obtain  VA financing. Underwriters will often evaluate veterans on a case-by-case basis  to determine if employment is stable, reliable and expected to continue. Recently  discharged veterans or those with part-time or commission-based jobs can  certainly earn favor from a VA lender, particularly if they exceed all other  preapproval criteria.

Retirees and  veterans on disability are also eligible for VA financing. Pensions, retirement  income and disability payments are considered “stable” sources of income.

Final  Check Prior to Loan Approval
Should a VA  loan applicant clear each of these hurdles, preapproval will likely be granted.  Keep in mind that all applicants are subject to a final credit check shortly  ahead of closing. Any job changes, credit slips or new debt can easily derail a  pre-approved buyer. Buyers need to be extremely cautious ahead of final loan  approval, and always seek a loan officer’s advice before making big financial  changes.

Don’t  underestimate the power of pre-approval. Pre-approval gives potential buyers a  solid estimate of their VA loan purchasing strength, and helps identify and  address any financing roadblocks. Buyers should always pursue pre-approval, and  should start the process as early as possible. The early bird gets the “VA  financing worm,” and acquires the many unbeatable benefits offered by the VA  home loan program.

This guest post was written by Jessi Hall, a former real  estate broker and investment property manager. She currently writes about real  estate, VA loans and homeownership for Veterans  United Home Loans. Follow Jessi on Google+ and the Veterans United Realty  blog.

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