We’ve had a few questions and opportunities for clarification at the VA Loans Insider page on Facebook recently regarding VA home loan eligibility and the nature of the VA loan guaranty. It’s a good idea to step back and offer a snapshot of VA loan qualifications and reiterate a mantra we’ve stressed several times: Being eligible for a VA loan does not guarantee you will get one.
Explaining the Guaranty
First, let’s talk about the word “guaranty” in the VA Loan Guaranty program. A guaranty is basically a promise to repay debt. In this case, the VA pledges to repay a portion of every loan in the event the veteran defaults. For most VA home loans, the agency provides a 25 percent guaranty. That financial commitment from the Department of Veterans Affairs gives lenders a sense of security and safety when it comes to lending money to veterans and active military.
The VA loan guaranty is not a “guarantee” that every veteran who wants a home loan gets one.
VA Loan Qualifications
Military borrowers who hope to use a VA loan to purchase or refinance have to meet requirements established by both the VA and by lenders. We’ve written elsewhere about the eligibility requirements for a VA loan. The VA has other standards related to credit and income, most of which are flexible and broadly defined. But VA lenders can and do enact their own, stricter requirements beyond what the VA mandates, which makes sense considering lenders are on the hook for 75 percent of the loan if the borrower defaults.
For example, the VA doesn’t have a specific credit score requirement. Lenders need a more clearly defined benchmark and, no matter the loan type, are going to have credit minimums in order to satisfy underwriters and entities that purchase mortgages on the secondary market. A lower credit score correlates with higher risk, and at some point lenders have to enact a cutoff. In the current lending climate, that’s usually a credit score of 620.
So, when it comes to VA loan qualifications, prospective borrowers will have to meet both the VA’s requirements and those set by lenders. Unfortunately, there aren’t any guarantees — in the common sense of the word — when it comes to mortgage lending. The good news: VA loans remain one of the most flexible and powerful lending programs on the market. Borrowers can purchase a home with no money down, no private mortgage insurance and little to no out-of-pocket costs up front.
That 620 credit benchmark is considerably lower than the requirement for many conventional loans. Plus, a 620 score will get you considerably better interest rates on a VA loan that it will on a conventional one.
The best way to get a sense of what’s possible is to get prequalified and then preapproved for a VA loan. These are non-binding steps that give veterans a clear sense of how much home they can afford and what kind of loan terms they can obtain. Loan prequalification can be done in minutes. You can talk to a loan specialist at 888-212-1958 or fill out a form at the Veterans United website.