When you apply for a VA home loan, it's easy to worry about whether you qualify for the right loan amount based on past credit issues, debt-to-income ratio, or employment issues.
But would-be homebuyers who might be more of a “borderline call” in terms of qualifying may be able to strengthen their chances with what are known as “compensating factors.”
According to the VA, "Compensating factors may affect the loan decision. These factors are especially important when reviewing loans which are marginal with respect to residual income or debt-to-income ratio." Compensating factors cannot be used to offset unsatisfactory credit but may be used when such factors "represent unusual strengths rather than mere satisfaction of basic program requirements."
A borrower who brings "significant liquid assets" to the deal could offset a weakness in other areas; such assets could be viewed as a compensating factor. "Valid compensating factors should logically be able to compensate (to some extent) for the identified weakness in the loan."
The VA adds that a lender may use “excellent credit history” to compensate. Lenders will look at credit history and patterns over the last 12 months, so it is crucial that you begin preparing your credit early. Late or missed payments, changes in marital status and other outstanding issues on your credit score can all prevent a lender from giving the “excellent credit history” status.
Some experts recommend starting the process of fixing issues on your credit report a year before you actually go house hunting since credit reports take time to dispute. Furthermore, don’t order just one credit report from a single agency. If a lender gets conflicting information from sources such as your application listing one marital status but your credit report lists another, it could hold up your loan application until the issue is resolved. Ensuring consistency across all credit agencies can help speed your loan application through approval.
While the Department of Veterans Affairs lets the lender exercise some flexibility in this area, it's still the borrower's responsibility to make sure they can afford the loan and the additional financial responsibility the VA mortgage would bring.