Tips & Special Topics
Debt-to-income, Residual Income and Credit Qualifications for VA Loans
Added September 29, 2009
The VA Home Loan Program enables a qualifying veteran to purchase a primary residence with no money down. When qualifying for a VA Loan, a VA-eligible borrower must show the lender that he or she has the ability to pay. The VA qualifying standards include income debt-to-income ratio, the borrower’s residual income and FICO scores. Of course, lenders vary and each may have additional qualifying requirements.
The debt-to-income figure is a ratio of a borrower’s debt to his or her income. The VA prefers a debt to income ratio of less than 41%. Debts that are considered for this number are:
• minimum credit card payments
• car payments
• student loan payments
• alimony, child support and any other major debts
• new monthly mortgage payment
Residual income is the amount of money left over each month to cover day-to-day living expenses after paying all of the above debts plus taxes, housing expenses like utilities, insurance, etc. Sometimes lenders will consider making a VA loan, even if the debt-to-income ratio is higher than 41%, as long as there is enough residual income. The VA considers what would be sufficient for that purpose by region and size of family.
Family Size Northeast Midwest South West
1 $390 $382 $382 $425
2 $654 $641 $641 $731
3 $788 $772 $772 $859
4 $888 $868 $868 $967
5 $921 $902 $902 $1,004
Over 5 Add $75 for each additional member up to a family of seven
In addition to debt-to-income ratio and residual income calculations, the borrower’s credit rating or FICO score is also a factor used in determining whether a veteran qualifies for a VA Loan. This is a lender requirement and not necessarily an element that the VA includes in its list of qualifying guidelines. Therefore, lender FICO score requirements may vary. If a FICO score is below what a particular lender requires, a potential borrower may find it necessary to repair his or her credit to an acceptable level.
A credit rating can be improved. Credit counselors can provide advice on best practices to improve credit. A list of ways to fix bad credit might include:
• Eliminating credit card debt but don’t close accounts
• Keeping current on all major debts such as car payments and mortgages
• Not applying for new credit until after you’ve closed on your VA Loan
Generally, healthy credit makes it easier to qualify for any type of loan. Although VA mortgage qualifying requirements are often less stringent than conventional loan programs, there is usually a minimum score required by the lender. Besides, good credit makes a good first impression with lenders who ultimately determine loan qualifications.
Sometimes a VA-eligible borrower’s credit isn’t necessarily bad, rather it’s non-existent. In cases where someone simply hasn’t established any credit, there are other things that can be taken into consideration. Lack of credit doesn’t necessarily mean someone is unable to participate in the VA Home Loan Program. VA-eligible borrowers who think they might want to get a VA Loan in the near future should be able to show a lender their ability and willingness to pay. Things like steady and ample income, timely rent payments, utility accounts in good standing, and checking accounts with consistent and sufficient funds can all be presented as examples of a person’s willingness and ability to pay a future debt and might be considered when applying for a VA Loan.
Credit can also be affected by a prior bankruptcy. VA lender guidelines are very clear for bankrupt history. If a borrower has filed Chapter 7, then he or she cannot qualify for a VA Loan for at least two years after the discharge date of the bankruptcy. The borrower will need to explain the circumstances under which he or she filed Chapter 7. And, he or she must have re-established good credit and have stable income that qualifies him or her financially.
If a borrower has filed Chapter 13, and is still paying on the debt, then he or she may still be considered for a VA Loan as long as the payments to the court have been made consistently for one year. A court trustee will need to give written approval. The borrower will need to explain the circumstances under which the bankruptcy was filed. And like Chapter 7 filers, someone in Chapter 13 must also have re-established good credit and have a stable job that qualifies him or her financially.
Though the VA determines entitlement and sets qualifying requirements that lenders must follow, lenders may set their own additional qualifying criteria.
A good rule of thumb for anyone who might consider a VA Loan in the future is to take care to make all payments on time and in full. This will ensure fewer hurdles when it comes time to qualify. To inquire about your credit score and find out more about the VA Home Loan Program’s qualifying requirements as well as those that may be required by your lender, contact a VA Loan specialist.
