Why seek prequalification?
If you undertake the prequalification process, it will help you to see and work around any problems you may have with obtaining financing or your eligibility for VA. Perhaps your credit rating isn’t all it might be, or your income level might not be high enough for the loan you want. The prequalification process will help you to identify and address any problems. If you obtain prequalification for your VA home loan, you can then move on to loan preapproval.
Aims of prequalification
You should look at prequalifying for a loan as a type of preliminary interview. The prequalification process has three chief purposes for lenders: To discover your service record and eligibility for credit, to generate an estimation of the maximum loan you can acquire, and to start the process of collecting the required documentation to give you preapproval and underwrite your loan.
Prequalifying for a loan can offer you substantial benefits. It doesn’t commit you to anything, and you can seek prequalification from as many lenders as you like, helping you to explore the market for different interest rates and conditions. Normally prequalifying involves a conversation of around ten minutes.
What will happen
Lenders will check your credit rating, and they will also ask questions regarding your job, your salary, and what your aims are, both in terms of property purchase and finances. Different loan companies will have a variety of ways in which they conduct prequalification discussions. However, you can typically expect to be asked the following:
- How much you want to borrow.
- What your job is, and what you worked as before.
- How much you earn before tax each month.
- What assets you have, e.g., savings, retirement funds, etc.
- Monthly outgoings, e.g., alimony, childcare, loan repayments.
- Whether you’ve defaulted on previous loans, been declared bankrupt, suffered foreclosure, etc.
- Whether you’ve ever fallen behind with, or defaulted on, debts owed to the government, such as a student loan.
- Whether you have been a homeowner in the recent past.
Once you give them the go-ahead, lenders will undertake a “hard inquiry” into your credit rating. These inquiries may slightly lower your credit score, but if they do, it will only be by a few points. If you’re looking for a mortgage, not every inquiry will cost your credit rating. Normally, the credit bureaus will count every inquiry made in 45 days as just one check, so that you can make multiple inquiries without harming your score.
There isn’t a set credit score to qualify for the VA loan program. You must bear in mind that the VA doesn’t actually give you a mortgage. Essentially, it offers insurance for the company that does give you a home loan. It is the lender, for example, goodtogomortgage, that will approve or decline your loan. As the loan company will assume the majority of the risk with home loans, they may have “overlays”: These are things they want to see in place that exceed VA requirements. A certain level of credit score is one of the most usual overlays.
The level of credit score required depends on the lender. If you’re looking for a very large loan, have recently been declared bankrupt, or lost a home to foreclosure, a higher score may be required. As a rule of thumb, VA lenders will usually be happy with a FICO score of 620; remember that any partner who will also be part of the loan must match the required credit score. Also, nine states have community property laws in place that mean lenders may look at your partner’s credit rating and financial standing even if you’re not putting their name on the loan.
Other things lenders need to know
When lenders see your credit reports, they will be given an insight into your monthly outgoings. Employing these in tandem with what you’ve told them about your income, they will work out a debt-to-income (DTI) ratio. This is used across the mortgage industry. For a VA loan, your monthly outgoings will be balanced against the money you have coming in each month.
The DTI ratio will be partly calculated with reference to how much you want to borrow. If your DTI ratio is close to critical, you might have to be flexible: Taking into account your particular circumstances and what the lender requires in order to get a DTI ratio that the lender is happy with, you may have to drop the amount you want to borrow.
Normally the VA is looking for a DTI ratio of 41% or lower. However, you can have a higher ratio than that and still be given a loan. Most lenders normally have their own DTI ratio limits as well. In the next lesson, will examine the DTI ratio more closely.
A poor credit rating and/or a high DTI ratio are often roadblocks to prequalification for some purchases.