Veterans benefits have been around for decades, but there’s no promise that everyone with military service can actually get VA loans.
This may seem fairly odd given that VA loans are one of the most important benefits offered to whose who serve. However, it is a fact that access to VA home financing is neither guaranteed nor automatic.
As the VA explains, it “cannot compel a lender to make a loan that would violate their lender policies. Lenders must also comply with VA income and credit standards. If a lender is unwilling to make a loan to you, we can only suggest that you try other lenders.”
What the VA is saying is that it’s there to help with specialized mortgage insurance, but the borrower must first be financially qualified.
As an example, lenders talk about “front” and “back” ratios when comparing debts and income. With most loans the front ratio compares monthly income with such costs as car payments and required credit card debt. The back ratio includes all the costs in the front ratio plus housing expenses such as mortgage principal, mortgage interest, property taxes and property insurance (PITI).
To illustrate, suppose you have a monthly income of $6,000. If 25 percent of your income before taxes can be devoted to monthly debts, lenders will allow you to have expenses for such things as car loans and credit card debt of no more than $1,500.
With a conventional mortgage you might see a front ratio of 28 percent and a back ratio of 36 percent (or, technically, 28/36). With VA financing the ratios are 41/41. In other words the VA has extremely liberal qualifying standards. With a given income you can borrow much more under the VA program than with conventional financing and by keeping down debts you can qualify for an even bigger loan than would otherwise be possible.
Beyond that, prospective VA borrowers with a debt-to-income ratio greater than 41 percent may still be able to secure home financing.
What about credit scores?
Credit scores reflect not how much you earn but how you handle debt. In the case of VA loans the real importance of credit scores is that a good score will help you get a lower mortgage rate. This means there’s a real financial benefit to paying bills on time and in full. Right now most lenders are looking for a score of at least 620.
You’ve worked hard for your VA benefits but with mortgages have to keep an eye on the bottom line – whether you’re now on active duty or out of the service.
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