VA lenders take a long, hard look at a prospective borrower’s credit, debt and income when evaluating a loan application.
There isn’t a credit score requirement to participate in the VA loan program. But many lenders want to see a score of at least 640 in the current climate before moving forward.
On top of that, prospective borrowers have to meet VA loan requirements regarding their debt-to-income ratio and residual income.
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Some borrowers sail through with a strong DTI ratio and more than enough money left over each month to cover family expenses, which is what the residual income requirement takes into account.
Others aren’t so lucky. But prospective home buyers with more borderline DTI ratios or residual income can take heart knowing there’s still reason for hope.
When one or both of those key elements are toward the margins, lenders can turn to what are called compensating factors,or strengths that help offset concerns and weaknesses in the buyer’s loan application. Compensating factors for a VA loan application could include:
The VA explicitly notes that compensating factors have to go above and beyond what would be considered a normal program requirement. Most of our veterans and active duty service members benefit from a combination of compensating factors.
What’s important is that you won’t be judged by one number alone, unless that one number happens to be your credit score.
If debt and income put you on the margins when it comes to qualifying for a mortgage, a VA loan’s compensating factors can be a valuable benefit and bring you that much closer to loan approval. But the VA is unmistakably clear that compensating factors cannot counteract the effects of bad credit.
It’s also worth noting that there are “negative compensating factors,” or conditions that can hurt your loan application. Some negative compensation factors that can hurt your chances of VA loan approval are:
Just as compensating factors can help borrowers on the edge, these negative conditions can serve to convince lenders you’re not a solid investment.
Whether you’re struggling with credit or just have general questions about how VA loans work, you can speak with a Veterans United Home Loans specialist anytime about your options at 855-524-7279 or get a free quote online today.
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A VA Loan is a mortgage option issued by private lenders and partially backed, or guaranteed, by the Department of Veterans Affairs. Here we look at how VA loans work and what most borrowers don’t know about the program.
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