The VA Loan Prequalification Process
VA Loans Process
Prequalification on a VA home loan enables military borrowers to correct red flags that could halt the loan process. During prequalification, a borrower might learn he or she needs to improve credit history and provide proof of self-employment income. It’s the borrower’s responsibility to get problems fixed to clear the path toward homeownership.
VA Loan Prequalification as First Step
There is no legal binding or obligation with prequalification, as it’s simply a step toward VA loan preapproval. Military borrowers may seek prequalification and preapproval from as many lenders as they like to compare costs and rates.
Lenders trust that potential borrowers are giving honest estimates of income and debt(s) during prequalification. With this information, lenders estimate the total loan amount a borrower could earn by evaluating a borrower’s eligibility based on service and credit. Lenders use this step to begin gathering the necessary paperwork for loan preapproval and loan underwriting.
It’s not until preapproval that lenders will start to confirm borrowers’ information, but that doesn’t mean borrowers should stretch the truth during prequalification.
Answering Prequalification Questions
It shouldn’t take more than 10 or 15 minutes to answer a lender’s prequalification questions. The answers help lenders determine a borrower’s purchasing power. Not all lenders approach prequalification the same way, but in general be prepared to answer questions about:
- Employment, past and present;
- The desired loan amount;
- Gross (pre-tax) monthly income;
- All monthly liabilities;
- Assets (bank accounts, retirement funds);
- Any federal debts or delinquencies;
- Derogatory credits;
- Previous homeownership.
Hard Inquiry Credit Check
Borrowers need to grant permission to lenders to pull their current credit report and score. Hard inquiries can trim a few points off a credit score, but the major credit bureaus offer some flexibility when it comes to shopping around. Generally, you don’t typically take a big credit hit if you do that shopping within a 30- or 45-day span.
Given that the VA is not the entity issuing the loans, it follows that there is no government-mandated credit score standard for VA loans. But lenders have their own requirements and will often look for FICO scores of 620 or higher. A lower score does not equate to VA loan rejection, and a higher score does not guarantee anything.
Other Prequalification Details for Lenders
Through your credit report, lenders can see many of your monthly debts. With debt and income information, lenders calculate a borrower’s initial debt-to-income (DTI) ratio. DTI ratios simply compare a borrower’s monthly income to their debts, including the potential mortgage payment.
Lenders do not establish a DTI ratio norm even though the VA likes to include borrowers with DTI ratios of 41 percent or lower. Since lenders’ standards vary, it is certainly possible to secure a VA loan with a higher DTI ratio, but it will depend on the rest of a borrower’s financial health.
Regardless, it’s possible to hit that 41 percent mark by lowering the sought-after VA loan amount. Lenders will often toy with the loan amount to lower the mortgage payment and thus the DTI ratio, giving borrowers more favorable chances of getting a VA loan.
Prequalification is the commitment-free, first step toward earning a VA home loan. Borrowers have the right to get prequalified and preapproved through countless lenders. Poor credit and high DTI ratios are still among the top reasons eligible borrowers are denied prequalification.