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What Agents Need to Know About VA Loan Credit Criteria

Thanks to the recent housing meltdown, loan programs are ratcheting up restrictions and locking countless capable buyers out of loan contention.

That's one reason why the VA loan program continues to boom.

VA loans offer flexible terms and big savings to our nation’s military homebuyers.

Eligible buyers can tap into 100 percent financing, low closing costs, no PMI (private mortgage insurance) and no prepayment penalties. Especially in today’s tough lending climate, it’s virtually impossible for qualifying buyers to find a cheaper or more powerful home financing tool.

VA loan credit standards are less stringent than those found with conventional financing. Your buyers can typically prequalify for the VA Loan program by meeting the following credit and income criteria:

Credit score

VA loans remain one of the most accessible financing options on the market, particularly when it comes to credit scores. Many VA lenders can approve borrowers with a credit score of 640. Most conventional loan programs won’t even consider an applicant with a score below 640, and only those with scores of 720 and above can secure the best terms.

Debt-to-income (DTI) ratio

VA loans also offer greater flexibility regarding DTI ratios. To calculate DTI, the VA tallies all of a buyer’s significant monthly debts (including housing and recurring debts) and divides that figure by monthly household income.

The typical conventional loan limits DTI ratios to 36 percent. The VA offers greater wiggle room by setting a DTI benchmark of 41 percent. The VA will even consider buyers with DTI ratios above 41 percent, based on their ability to meet other VA guidelines.

Residual income

Residual income is the amount of net income that must be available (after deduction of debts and housing expenses) to cover a family’s living expenses such as food, health care, clothing and gasoline.

The VA sets specific residual income requirements, which vary by region and family size. For a complete look at income requirements for your area, check out this article about residual income at VA Loans Insider.


Military borrowers with at least two years of full-time employment history are preferential VA loan candidates. Lenders are big fans of reliable income, so it can be more difficult for part-time, seasonal or commission-based workers to measure up.

That’s not to say there aren’t options for those with less-than-perfect employment records. VA lenders carefully consider all of an applicant’s qualifications, providing flexibility for those who don’t meet the gold standard for employment.

Past foreclosure/bankruptcy

VA loans are more relaxed than conventional loans when it comes to recent foreclosure or bankruptcy. In most cases, prospective buyers will be eligible to obtain VA financing once two years have passed. But there are cases where a veteran can be eligible a year after a bankruptcy discharge.

Applicants must have maintained impeccable credit since the event, and they may have to provide a written explanation for the foreclosure or bankruptcy. But considering that few financing options exist for these buyers, the VA loan is a great route to pursue.

Credit help for military buyers

VA credit guidelines are undoubtedly less stringent than conventional requirements. But it’s a fact in this economy that some military buyers will fall a bit short.

Credit-challenged military buyers may want to consider the assistance of the professionals at Veterans United Home Loans. Veterans United offers free home loan consultations to future military homebuyers through its Lighthouse Program. Lighthouse helps veterans identify and correct credit problems, with the ultimate goal of qualifying for VA financing.

Help your buyers understand that repairing credit does take time and effort. But with a little budget-shrinking and belt-tightening, any military buyer can get closer to the VA standards for homeownership.

After you've read about VA loan credit criteria, are you or your buyer interested in choosing a VA loan? If so, you might consider checking out some recent guidelines to help you decide if a VA loans is right for you.

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