Applying for any line of credit can be stressful, but if you know what your lender is looking for from your VA home loan or refinance loan application, you will have a much easier time preparing for the loan. In general a borrower should spend at least a year preparing for a new home loan in order to get credit in order, save up for the expenses associated with the loan, etc.
Knowing what your lender is looking for from your credit data is a very important aspect of getting prepared. For example, did you know that borrowers should come to the VA home loan process with no less than 12 months of on-time payment on all financial obligations? Anything short of this could jeopardize your application, but knowing the “12 month rule” can be a huge help where the timing of your application is concerned.
What does the lender look for on your credit report? Your employment history? Income? There are a variety of things that make a potential borrower a good credit risk; stability and reliability are two very important aspects of your payment history AND your income. Consider what the VA Lender’s Handbook, VA Pamphlet 26-7, has to say about the lender’s job when it comes to verifying your financial data. Lenders are required to:
“Identify and verify income available to meet:
• the mortgage payment,
• other shelter expenses,
• debts and obligations, and
• family living expenses.
Evaluate whether verified income is:
• stable and reliable,
• anticipated to continue during the foreseeable future, and sufficient in amount.”
There is no specific set dollar amount assigned in this section that tells the lender you are or are not qualified for a home loan. Instead, your outgoing financial obligations are compared with your income to see what percentage of your income is taken up by your monthly payments. This is called the debt-to-income ratio and is just as important as your credit score where loan approval is concerned.
The duration of your employment history is also a factor. From the VA Lender’s Handbook:
“Generally, employment less than 12 months is not considered stable and reliable. However, it may be considered stable and reliable if the individual facts warrant such a conclusion. Carefully consider the employer’s evaluation of the probability of continued employment, if provided. Assess whether the applicant’s training and/or education equipped him or her with particular skills that relate directly to the duties of his/her current position. This generally applies to skilled positions. Examples include nurse, medical technician, lawyer, paralegal, and computer systems analyst.”
As you can see, the lender has some freedom to interpret the borrower’s financial data and make a determination based on it. Borrowers should know that all VA loan applications are processed on a case-by-case basis based on the guidance given above-there are gray areas and exceptions to many of the rules that can allow a lender to consider compensating factors in a loan application that could make up for some shortcomings in other areas. Speak to a loan officer to see what may apply to you and your circumstances.