Getting approved for a VA home loan in today’s digitized world has made getting approved for a home loan so much easier, less expensive and faster. Prior to the major overhaul of mortgage loan underwriting, just getting the loan application documented to the point where it could be ready for the underwriter could take two or three weeks. And once the loan was transferred over to the underwriter the file could be in the underwriter’s department for maybe another week. Closing on a home loan in 30 days or less sometimes was a challenge.
The underwriter would review each and every piece of documentation making sure what was submitted to the underwriting department conformed to proper VA lending guidelines. To verify gross monthly income, borrowers provided their most recent copies of pay check stubs along with the last two years of W2 forms. For any income outside of an employer, borrowers had to submit copies of 1099 forms and if someone considered to be self-employed then two years of federal income tax returns were needed. Bank and investment statement copies were also required to verify there were enough borrower funds to cover closing costs and other fees.
As it related to qualifying credit, lenders would request a credit report from a credit reporting agency. Typically, this meant faxing a copy of a loan application to the credit agency and the credit report would be faxed or mailed back by the next day. Once the credit report was received it was included in the file for the underwriter to review. The underwriter would look at the credit report line item by line item and look for things such as any late payments made 30, 60 or 90 days past the due date. The underwriter would compare account balances with the accompanying credit limit. Any past collection accounts or judgments were also listed on the credit report.
If there were any late payments noted, the underwriter could request more information from the applicant as to why the payments were late. If the underwriter approved the reason for these late payments, the loan could still be approved. But the underwriter could also decline a loan application for the very same reasons. An underwriter could give more scrutiny to the entire loan package if account balances were high compared to available credit lines. The credit review itself could take several days if the underwriter had any questions about the loan file.
However today, credit scores replace most of the scrutinizing of a credit report. VA loan programs consider credit scores and do not require a line item by line item assessment of a credit file. Instead, credit scores provide approved VA lenders with lending guidelines. As it relates to credit however, the VA does not specify a minimum credit score but lenders do. The VA does require lenders to review the applicant’s past payment patterns and make the determination the borrowers will pay the new VA loan back on time every time.
Credit scores are broken down into five categories with each category providing its own impact. These three digit numbers range from 300 to 850. The algorithm used to calculate credit scores review the same information an underwriter would several years ago before electronic loan applications and loan approvals but do it much, much quicker. How much quicker? When a lender requests a credit report and credit scores, the information is returned to the lender almost instantaneously. There are three credit scores provided, one each from the main credit repositories of TransUnion, Experian and Equifax. Lenders will typically use the middle of the three scores while ignoring the highest and the lowest.
Credit scores look at payment history, account balances, how long someone has used credit, types of credit used and credit inquiries. Payment history looks for any late payments or collection accounts or a past bankruptcy and makes up 35% of the score. Account balances should be near one-third of available credit but can falter when account balances approach credit lines. This category makes up 30%. The longer someone has responsibly used credit, the higher the scores will be and make up 15% of the score. Types of credit look at the different types of credit used and credit inquiries address how many recent requests for different types of credit the applicant has made. These final two categories each provide 10% toward the final score.
Again, the VA doesn’t require minimum scores but do request verification of a responsible credit history. This can mean an isolated late payment or two can appear on a credit report but if the credit scores are below what the lender requires, the loan might not be approved. If for example there are other positive factors in the file that can offset a lower score the lender can still approve the loan application. If for example the lender’s credit score minimum is 620 but the qualifying credit score is 600, the loan may still be approved given for example the applicant’s long standing employment history or that there are other multiple credit accounts that do not show any late payments. And the most important compensating factor is a timely rental history over the past year or two.
If borrowers aren’t quite confident about what their credit scores will be once a loan application is submitted, a phone call to the loan officer will provide the applicants with all they need to know and if necessary, the loan officer can provide a road map the borrowers can follow to get their scores to qualifying levels.