Since first being introduced back in 1944 the Department of Veterans Affairs has helped millions buy and finance their home with a VA mortgage. Lending guidelines established by the VA allow lenders to underwrite and approve a VA loan application with no money down and have the ability to sell that loan in the secondary market, providing still more funds to make more VA loans. Qualifying for a VA loan is much like any other as it relates to credit, income and employment with the VA adjusting program guidelines over the years to meet market demands while still providing stability in the mortgage market.
It’s interesting to note here the VA was the one agency that did not relax its underwriting guidelines leading up to the mortgage fiasco back nearly 10 years ago. VA loans have always made sure the applicants demonstrate an ability to repay a mortgage and never waded into the “stated income” or “no documentation” arena like other mortgage programs did.
Today, there’s a new program that allows mortgage lenders to approve a VA loan with a credit score as low as 500. And that’s something new. Note that the VA does not require a minimum credit score for any of its loan programs yet most mortgage companies do and set a minimum score of anywhere from 600 to 620 for a traditional VA home loan. This new program is for those with a qualifying credit score of no lower than 500 and no higher than 579.
Credit Score Calculations
Mortgage lenders use a credit score developed by the FICO Company. This three digit number will range from as low as 300 to as high as 850 with the highest number representing the better credit. Scores are calculated based upon certain characteristics of the borrower’s credit history. There are five such categories and they look at Payment History, Available Credit, Length of Credit History, Types of Credit Used and Credit Inquiries.
Payment history and available credit both make up nearly two-thirds of the entire score with payment history accounting for 35% of the total score and available credit 30%. When payments are made more than 30, 60 and 90 days past the due date, scores will drop and when account balances approach the credit limit and reduce available credit, scores will fall even further. Length of credit history is simply how long someone has used credit while types of credit used looks at credit histories of an automobile loan, credit card and other revolving accounts. A credit inquiry is logged when the consumer makes a direct request for new credit.
Getting the Approval
When a loan application is first submitted to the lender, the lender uploads the electronic file to an automated underwriting system. With most VA loans, the lender submits the file as a VA loan to the automated underwriting system developed by Fannie Mae called Desktop Underwriter, or DU. Once submitted, DU quickly reviews the file while reviewing credit scores and credit report. This is a very quick process and the lender typically receives the approval within moments. The results are called “findings” and provide the lender with a list of documentation required to proceed with the approval.
However, sometimes a loan application doesn’t receive the notice of approval and instead the response is, “Refer/Eligible” which means the loan is eligible for an approval but must be approved manually. A manual approval is where the underwriter literally reviews the loan file one document at a time to make sure the file does meet minimum VA standards. With a manually underwritten loan, the maximum credit score goes from 579 to 639.
This loan program follows the Qualified Mortgage standards established by the Consumer Finance Protection Bureau, or CFPB. The lender is required to make sure the loan follows these established guidelines when processing and approving the loan. The “ability to repay” rule is followed which means the total debt to income ratio should be at or below 41. This means total monthly credit obligations, including the mortgage payment, should be 41 percent of gross monthly income for all who are on the loan application.
Eligible property types include a single family home, either attached or detached, a multifamily home up to four attached units, a condominium unit as long as the condominium project is VA approved, a PUD and townhouse. Again, the borrowers must occupy the property as a primary residence. In the instance of a multifamily property up to four units, the borrowers must occupy one of the units.
Should the buyers be “first timers” and taking advantage of a Down Payment Assistance Program or receiving a financial gift from a family member or qualified non-profit agency, the borrowers must complete a HUD approved Homebuyer Education Course if the credit score is below 580.
So far this might sound like a traditional VA home loan and many of the qualifying requirements are in fact identical to a traditional loan. The primary difference is this program was designed for those who have experienced a credit setback of some sort that has driven their credit scores below the minimum required for a traditional VA loan. There are some variances but the primary characteristic is allowing the score to be as low as 500, not 620.
Inexperienced loan officers and mortgage companies not fluent with VA guidelines can mistakenly turn down a VA loan application because the score is below the minimum when in fact the borrowers might very well be approved if submitted and underwritten with this very special program.
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