Mortgage preapproval is incredibly important in today’s homebuying market. Getting preapproved shows sellers and real estate agents that you’re a committed and qualified homebuying candidate. Some listing agents and sellers won’t even accept a purchase offer from buyers without a copy of their preapproval letter.
Preapproval provides buyers with a clear understanding of their purchasing power and the steps needed to reach closing day. However, keep in mind that preapproval isn't always a guarantee of financing.
With preapproval, you'll have a realistic view of what you can afford, enabling you to make a strong offer without stretching yourself too thin.
Preapproval is a more detailed process than prequalification. Other than pulling your credit reports, lenders basically rely on your word and your best estimates of what you can afford during the prequalification conversation.
During the preapproval process, lenders want to verify information. You’ll typically need to provide financial documents like pay stubs and bank statements and sign non-binding forms and paperwork. Lenders will be looking at cold, hard numbers and creating the most realistic picture possible of your purchasing power.
This is one area where you have a lot of control – the faster you return paperwork, the faster your VA loan process moves.
Here’s a look at some documents you may need to provide or give a lender permission to obtain:
VA lenders generally rely on an “Automated Underwriting System,” or AUS, to determine a buyer’s preapproval status. An AUS is a computer program that instantly evaluates a buyer’s eligibility, based on a variety of factors.
Not every qualified borrower will obtain AUS approval. In those cases, lenders will consider a “manual underwrite,” which is a more involved process that typically utilizes more stringent requirements.
Here’s a look at some of the key factors involved in VA loan preapproval:
Credit is a make-or-break financial indicator. Credit score benchmarks for VA loans can vary by lender and other factors. Many VA lenders are looking for a minimum FICO credit score of 620.
It’s also important to request copies of your credit reports and dispute any errors. If you find discrepancies, work with your lender to resolve the issues before applying for a mortgage.
If your credit score falls short, please consider the complimentary credit-strengthening services offered by our incredible Lighthouse Program®.
The credit experts at Lighthouse work with Veterans, service members and their families for free to develop a plan to repair their credit and get on the path to loan preapproval. Our Lighthouse Program has helped more than 50,000 people go on to boost their credit and close on a home loan.
Lenders are going to look at your major recurring debts as part of their assessment. They’re considering housing payments, student loans, car payments, child support payments and other consistent expenses. They’ll also look at things like collections, judgments and other forms of “derogatory credit.”
Generally, you don’t need to be debt-free to qualify for a VA loan. Lenders are looking for a healthy balance between monthly debt and monthly income. But some types of debt are worse than others.
For example, a tax lien can often prevent lenders from processing your loan file through an Automated Underwriting System (AUS), resulting in the need for manual underwriting with tougher lending requirements.
You don’t need a job to secure a VA loan – just ask retirees. It’s more an issue of whether you have a stable, reliable income that’s likely to continue. There’s an array of income types, and some are more stable and reliable than others.
For most VA borrowers, their primary income source is a job, whether it’s serving in the military or working in the civilian world.
A solid employment history says a lot about your ability to repay a loan. The gold standard of employment for many lenders is two years of reliable, full-time employment, ideally with the same employer. But real-world resumes aren’t always this pristine.
That’s why the VA and lenders allow flexibility when it comes to employment standards. There are no clear-cut “pass/fail” employment criteria. Rather, each applicant is considered on an individual basis, with a focus on three key measures:
Having a gap in your employment history isn’t uncommon. But lenders will want to take a closer look if you’ve had some time without a job in the lead-up to pursuing a home loan.
You may need to have been back to work for a certain number of months before lenders can move forward. Changing jobs during or even right after the loan process can also affect your chances of closing.
The VA doesn’t set an income threshold for potential borrowers. You don’t have to make a certain amount per hour, month or year to qualify for financing. Instead, one way the VA and lenders evaluate what you can afford is by comparing what you spend each month to what you earn.
This calculation is known as a debt-to-income (DTI) ratio, and it's an important consideration for VA lenders. Most VA lenders look for a DTI ratio of 41% or less.
It’s also important to see how much residual income you have. VA borrowers must have a minimum amount of money left over each month after paying their major expenses. The amount varies based on your family size and where in the country you’re buying. The aim is to make sure borrowers have enough discretionary income to cover everyday needs like gasoline, groceries and medical bills.
To calculate your residual income, a lender will simply subtract your major monthly debts from your gross monthly income. You may be able to omit a spouse or dependent from the calculation if they’re not on the loan and have verified income to support themselves. Also, lenders may be able to reduce the residual income requirement by 5 percent for active duty borrowers because on-base goods tend to be cheaper.
However, prospective borrowers with a DTI ratio above 41 percent must exceed their residual income requirement by 20 percent.
A co-borrower on the loan with you can be a tremendous benefit. Counting this person’s income can help you buy more house. However, there are some restrictions and requirements for VA co-borrowers.
Just as a co-borrower’s income can help, this person’s credit and debt profile can also harm your loan approval chances. You may be separate people, but lenders will look at your loan application as a single entity.
Your co-borrower situation can also impact what kind of VA interest rates you get quoted. Lenders will typically quote a rate based on the lowest of the borrowers' credit scores. So if you have excellent credit, but your co-borrower only has so-so scores, you're often stuck with so-so rate quotes.
This person will be legally and financially obligated on the loan. They’ll also typically need to occupy the home with you as their primary residence. Lenders may also have limits on how many borrowers can be on a single loan.
Here at Veterans United, we currently allow up to four borrowers on a VA home loan.
The goal of the preapproval process is to obtain what’s known as a “preapproval letter.” It’s an increasingly important document in housing markets nationwide.
A preapproval letter will typically list a series of conditions that need to be met in order for the loan to move forward. These conditions help protect both lenders and borrowers in case things don’t go as planned or financial circumstances change.
While your VA timeline can vary, it usually takes anywhere from a few days to a week to receive your preapproval letter. The VA preapproval process may move quicker if you have all of the required documentation in hand. At Veterans United, we can often provide a preapproval in as little as 24 hours.
60 to 90 days is usually when VA preapprovals become outdated. After this period, lenders may find it necessary to look at your finances again to ensure your preapproval letter is the best possible reflection of your purchase power.
Most preapproval letters also clarify that changes to your credit, income or other important financial metrics can cause the document to expire. Again, loan preapproval is not the same thing as formal loan approval. It’s also not a binding step. You can seek preapproval from multiple lenders.
Some lenders may allow you to alter the date and the preapproval amount (up to your max) in order to craft a strong offer without tipping your hand. You might be preapproved for a $300,000 loan, but it may not be in your best interest for home sellers to know how high you can go.
While this document isn’t any kind of guarantee, a preapproval letter gives you a clear sense of what you can afford and what it will likely take to land a VA home loan. Loan preapproval also gives you the confidence and clarity to start seriously shopping for your home. Sellers and their agents will be looking for this.
If you have any questions or would like to start your own VA preapproval, please reach out to one of our Veterans United VA Loan Experts at 1-800-884-5560.
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