What Qualifications should I be aware of when using my VA Benefit?
When thinking about a VA Loan qualification it is important to keep in mind that there could be many of them depending on your circumstance. You may need to provide certain forms, proof of income, debts/obligations, Ratio/residuals, and other compensating factors. Below you will find explanations and bullet lists for each category.
Whenever there is money involved and it is being borrowed, proof of income is going to be required. Here are some general requirements for income verifications.
Verification of two years of employment. If you have been employed less than two years at your current job, you must still provide verification of prior employment to cover a total of two years in that same profession.
Over time, part-time or second job income cannot be considered reliable unless you have received the income for 2 years.
Income from self-employment may be used when it has lasted for at least two years. Copies of the past two years business and individual tax returns must be provided.
These are some of the debts and obligations that you need to be aware of when looking to get a VA Loan. If any of these are something you have dealt with in the past make sure to call us to see if there is any way around it.
Credit reports – A credit report is a mandatory obligation before getting pre-approved for any loan. Even though the VA doesn’t require a certain credit score, the lender does. Another thing to remember that an absence of credit history is not a reason for disapproval.
Judgments – The VA Loan cannot be approved with an unpaid judgment regardless of other factors.
Collection Accounts – A borrower with an unacceptable credit history does not become acceptable simply by paying off collection accounts around the time of the loan application. Conversely, a borrower with an otherwise favorable history might be considered acceptable with an isolated unpaid collection account. If a borrower is disputing a collection account, VA will not insist that it be paid as a condition for loan approval. However, a bonafide dispute should leave some sort of a paper trail and this should be validated.
Chapter 13 – A paid as agreed history for 12 months and a letter from the trustee would constitute reestablished credit if there were no other derogatory items.
Chapter 7 – This bankruptcy requires a period of two years since the bankruptcy was discharged. An exception would be a documented situation where the majority of the debts were medical in nature. This would be beyond your control and would require 12 months with no derogatory credit.
Foreclosures – If you have had a foreclosure before, then you would need to follow the same guidelines as if you had a chapter 7 bankruptcy. Keep in mind that if the foreclosure was on a VA-guaranteed loan and VA suffered a loss, you may not have enough remaining entitlement to guaranty the new loan.
Federal Debts – These debts must be paid in full, in uncollectible status, or on a repayment plan.
Divorce situations – Delinquent payments made after assignment of responsibility to a spouse may be disregarded.
Child Care – These expenses are still included in the Debt to Income ratio on VA Loans. The tax credits for these expenses would be a compensating factor.
Ratio and Residual
Debt-to-Income Ratio – A debt to income ratio will compare your anticipated monthly housing expense and total monthly obligations to the total monthly stable and reliable income. This method assists in the assessment of the potential risk of the loan. The lower the ratio is, the better the chance of getting pre-qualified for a higher amount.
Residual Income – Residual income guidelines are used to determine whether your monthly discretionary income is sufficient to meet living expenses after estimated monthly shelter expenses have been paid and other monthly obligations have been met.
Other VA Loan Qualification factors
Compensating factors are looked at when loans are marginal. For example, if your circumstance involved a high debt to income ratio or a shortfall in residual income, these factors would come to play. However, they cannot be used to compensate for unsatisfactory credit. These factors include, but are not limited to the following:
- Excellent long-term credit history
- Conservative use of consumer credit
- Minimal consumer debt
- Long-term employment
- Significant liquid assets
- Down payment or the existence of equity in refinancing loans
- Little or no increase in shelter expense
- Military benefits
- Satisfactory previous home ownership
- High residual income
- Low debt-to-income ratio
- Tax credits for child-care
- Tax benefits of home ownership
As always if you have any questions about a particular VA Loan qualification or multiple that may impact you, please reach out to us. Give us a call at 360.571.5626 or email us at GreenwaldTeam@Creeksidem.com.