VA Loan Prequalification
If you are an active-duty military member or a Veteran of the armed forces or national guard, you may qualify for VA home loan benefits as specified by the Department of Veterans Affairs. As you consider applying for a VA home loan, you may have heard of VA loan prequalification. Prequalification is a process that gives you an idea of how much a VA purchase lender is willing to loan to you, based on your credit score and other factors. It’s not a guarantee, but it can mean you are likely to get a loan from the lender, and it simplifies the process when you do apply for a loan. Something else to remember is that prequalification is not the same as applying for a loan. You may also be wondering how prequalification is different from VA loan preapproval. At HomePromise, we use the term prequalification but our prequalification is similar to what others call a preapproval. We’ll explain the goals of prequalification, how it makes applying for a VA purchase loan easier, and more in this article!
Why Prequalify for a VA Loan?
As we said before, prequalification tells you what your prospective lender thinks of your financial situation. It gives the lender a chance to assess your situation and make an initial judgement on a potential loan amount they would give you. If they see significant potential roadblocks to giving you a loan, they will let you know. This is great for you because you can start to address these issues before you go to the trouble of applying for a loan or finding a home to buy. For example, if your lender will only approve you for a loan if your credit score looks better, you can start working on improving your credit score. You may also need to look into repaying your debts quickly, or trying to find a co-borrower for your VA loan so that you qualify for a larger loan. Prequalification is a good idea because it means you will know more about what to expect when you apply for a loan, and means you may have a better chance at getting approved when you do apply.
An added benefit of prequalifying for a VA loan is that a prequalification letter can actually help you buy a home! When you prequalify with a lender, they will give you a letter certifying that you are prequalified, explaining why, and specifying the amount that they are comfortable lending to you. This adds credibility, and sellers are more likely to accept your offer if you can show that a lender believes you will make your payments. However, an important tip is that you should prequalify for the specific property you are looking at! If you have a general letter of prequalification that doesn’t apply specifically to the home you want to buy, sellers may see that you are actually approved for more than you are offering. This could hurt your negotiating power, so we recommend you get prequalified for the specific property you want. One other perk of having a prequalification letter is that the best realtors won’t work with you unless you have one. Long story short, getting prequalified can make buying a home cheaper and easier!
The Goals of Prequalification
Prequalification will not take much time – you should expect to spend about 15 minutes answering questions and applying with a lender as part of the prequalification process. This will help you learn more about your service eligibility, what your lender thinks of your credit history, and give you a sense of what loan amount you can expect to get. Your lender will communicate this in a prequalification or preapproval letter. Plus, this can expedite your loan application process when you find a home and apply for your VA loan. Prequalifying also gives your lender a chance to start gathering the documentation needed for loan underwriting.
What You Can Expect During a VA Loan Prequalification
A lender may inquire about several things during the prequalification process. You can expect to be asked about your credit history (including any bankruptcies or foreclosures in your past, your employment history (including current or recent employers), and assets (like bank accounts and retirement funds). They may also ask for your desired loan amount, your monthly income before taxes, and any previous homeownership.
What VA Lenders Typically Look For During A VA Loan Prequalification
When you answer prequalification questions, VA lenders will look at your information carefully. Typically, your lender will be looking for things that would indicate how likely you are to pay your mortgage payments on time. They will look at your credit reports to find information on monthly debts, which means they will pay attention to how much money goes to payments each month. With that information and your income, they will calculate an initial debt-to-income ratio (DTI). A DTI ratio compares your monthly income with your monthly debts, to see how much of your income goes to pay off debts each month. Lenders will use that initial DTI ratio and factor in potential mortgage payments to determine if you qualify under Department of Veterans Affairs guidelines.
The VA prefers borrowers to have DTI ratios of 41% or lower, so lenders may adjust the potential loan amount so that monthly mortgage payments would be less. This could keep your DTI ratio at 41% or lower. That’s how your lender will come up with an estimate of a loan amount that will be ideal for you. Also, through that process you can find out how big your monthly payment will be and you can assess whether you think you’re comfortable with that payment. You’re ready to go shopping for a home when there is a match between your comfort level with the mortgage payment amount and your lenders willingness to lend with that amount. But it’s important to know that the VA as a government agency does not force every lender to deny everyone with a DTI ratio higher than 41%. In fact, lenders’ standards are all different. At HomePromise we often give Veterans and active-duty military members VA loans with a higher DTI ratio than 41%; sometimes even higher than 50%.
VA Loan Prequalification with HomePromise
All VA lenders are different. This is especially true during VA loan prequalification. Because every lender’s guidelines for maximum loan amounts and maximum DTI ratios are different, you should look for a lender that is known for approving people with difficult credit histories and higher DTI ratios. At HomePromise, we have a history of approving Veterans with challenging credit histories, and if you prequalify with us today, we may give you a loan amount that would go above the 41% DTI ratio requirement when other lenders would not budge. Prequalifying with us is always free, so call today at 1-800-720-0250!