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 vs. Preapproval

Prequalification and preapproval are related but distinct steps in the VA loan process, and understanding the difference can help you know what to expect at each stage.

Prequalifying for a VA loan is based primarily on information you provide. Your lender uses what you share about your income, employment and financial history to give you an initial estimate of what you might be able to borrow. No formal financial documents are required, though your lender will pull your credit with your permission.

VA loan preapproval goes further. You'll submit documents like pay stubs, bank statements and tax returns so your lender can verify your finances and issue a formal preapproval letter.

Think of prequalification as the estimate and preapproval as the confirmation. One tells you what might be possible; the other puts it in writing.

Prequalification and Your Credit

When you prequalify with Veterans United, we do a soft credit check with your permission. Unlike a hard inquiry, a soft credit check doesn't affect your credit score and gives us an initial look at your credit profile.

Some lenders may conduct a hard credit inquiry during prequalification, which can cause a small, temporary dip in your score. If you're shopping around with multiple lenders, the credit bureaus typically count all mortgage-related hard inquiries within a 45-day period as one check, which limits any impact to your credit.

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 finance 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 finance 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.

VA 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 a community property state, 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.

Lenders 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% 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 for a VA loan.

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 Veterans United crediting consultants.

Our trusted credit 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. Our credit consulting team has helped more than 100,000 Veterans and service members overcome their credit challenges and go on to close on a home loan.