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 620 in the current climate before moving forward.
On top of that, prospective borrowers have to meet VA standards regarding their debt-to-income ratio and their residual income.
If your credit score could use an overhaul, Veterans United’s Lighthouse program can coach you through credit problems and help you achieve your dream of homeownership.
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.
These are strengths that help offset concerns and weaknesses in the buyer’s loan application. There’s a laundry list of things that can be considered, including:
- A sterling credit history
- Minimal debt
- Long-term employment
- Significant liquid assets
- Military benefits
- Conservative use of credit
- And many others
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.
Negative Compensating Factors
The VA is unmistakably clear that compensating factors cannot counteract the effects of bad credit.
Shaky DTI or residual income? Might not be a huge problem depending on any compensating factors.
But a credit score below 620 isn’t something that borrowers can mitigate or that lenders can justify.
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.
It’s also worth noting that there are “negative compensating factors” as well. These are conditions that can hurt your loan application, such as previous bankruptcies, foreclosures and late payments.
Just as compensating factors can help borrowers on the edge, these negative conditions can serve to convince lenders you’re not a solid investment.
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