When applying for a VA home loan, it's easy to worry about how past credit issues, debt-to-income ratio, or employment issues could affect your loan approval.
Even if you meet minimum VA loan credit requirements, the VA loan program has standards for debt-to-income ratio (DTI) and residual income. But future homebuyers with DTI or residual income concerns may be able to strengthen their chances with what are known as "compensating factors."
VA loan compensating factors are supplemental data points in a VA loan application that go beyond the normal VA approval requirements. These factors can be considered by VA lenders when typical qualification standards such as your credit or debt-to-income ratio are not as strong as they could be.
Compensating factors can help offset residual income or debt-to-income ratio (DTI) concerns, but lender credit requirements still apply.
A debt-to-income ratio is a percentage of how much of your monthly income goes to recurring debt payments. Residual income, on the other hand, is a flat dollar amount that you have leftover after paying all your major expenses including your new estimated mortgage payment. The VA has guidelines for both DTI and residual income that lenders use when determining how much you can afford.
A few compensating factors the VA can consider include:
Of course, this isn’t an exhaustive list, and every borrower’s situation is unique.
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 impacting your credit score can all prevent a lender from approving your credit.
Some experts recommend starting the process of fixing issues on your credit report a year before you go house hunting since credit reports can 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 a VA mortgage would bring.