Characteristics of Successful VA Loan Homebuyers
The VA loan program has opened the doors of homeownership to millions of military members, veterans and their families since 1944.
Millions more are eligible for this home loan benefit. But being eligible for a VA loan and securing one can be two different things.
Veterans and service members must meet credit, income and other VA and lender requirements.
Veterans can take several steps to put themselves in a great position to maximize their VA loan benefits.
Let's take a closer look at some of the key characteristics of successful VA homebuyers.
Know Your Credit Score
To start your homebuying process right, get familiar with your credit score and your credit report before starting the mortgage process.
By being in the know early on, you'll have a chance to try to correct mistakes and avoid unpleasant surprises.
The VA has no minimum credit score requirement, but VA borrowers must meet a lender's guidelines. That benchmark is typically lower than what you'll need for conventional and Federal Housing Administration (FHA) loans, but it can still be a challenge to achieve.
Lenders use your credit score, and look carefully at the information on your credit report, to see if you even qualify for a loan and, if so, what interest rate you'll be charged.
The three major credit reporting companies are Equifax , Experian and TransUnion. You can get free copies of your credit reports from Annual Credit Report.com. Check them for errors or bad accounts that could hurt your score. By the way, checking your own credit won't hurt your score.
Credit Score Ranges
Credit scores range from 300 to 850. The average score nationwide was 716 in 2021. But a score of 620 is generally considered the minimum among most mortgage lenders.
"Most lenders will use a credit score to help determine your interest rate and to lower risk," the VA says. "Typically, lenders may want borrowers to have a minimum credit score of 620, unless there is a large down payment."
If your scores are around 750 or higher, you're considered the best risk for a loan and will earn the best mortgage rates.
Scores lower than that may limit your ability to obtain the best rates. If you're below 600, experts typically suggest you work to try to improve your score before applying for a mortgage.
Improving Your Credit Score
The stronger your credit, the better position you'll be in -- not just to get prequalified and preapproved for a VA loan, but also to land better rates and terms.
Work hard to pay down credit card balances and tackle high-interest debt.
If you see errors on your credit report, dispute them immediately. If needed, you may submit a complaint to the Consumer Financial Protection Bureau here.
Be very careful about potential scams. Companies that promise to fix your credit score, but which demand payment in advance, are often fraudulent.
Having a Healthy Debt-to-Income Ratio
No matter the type of mortgage, lenders will take a hard look at your monthly income and monthly debts and calculate your debt-to-income ratio.
The debt-to-income ratio, known as DTI, is calculated by adding your total monthly expenses and dividing the total by your gross monthly income, meaning your earnings before taxes are taken out. The lower your DTI ratio, the less you're seen as a credit risk.
Why make the road any tougher? Try to get a handle on your monthly DTI ratio at the outset. See whether you can pay down or outright eliminate some of those major recurring expenses before adding a mortgage to the mix.
What Is a Healthy Debt-to-Income Ratio?
The VA generally wants your DTI ratio at or below 41%, but it's possible in some cases to exceed that threshold and obtain financing. In those cases, the veteran is typically going to need to meet additional requirements.
How to Improve Your Debt-to-Income Ratio
Make a list of all the money you owe and to whom. Regular bills, like your phone or utility bills, are not considered debt.
Common debts are automobile loans, credit card or medical debts, mortgages or past due amounts on rent, back child support, money owed to friends and family, payday loans and student loans.
One of the best ways to improve your debt-to-income ratio is to pay more than the minimum balance due
every month on your debts. That can set you on the road to reducing your debt much more quickly.
Pick a strategy for deciding which debts to tackle the most aggressively: either those with the highest interest rates, or those with the smallest balances first to get them out of the way.
Employment and a Stable Income
Successful VA homebuyers have an employment and income picture that gives lenders confidence.
Lenders obviously want to make sure you can afford the mortgage payment, along with other monthly necessities. They're also looking for evidence that your income is stable, reliable and likely to continue.
Self-employment, part-time employment and commission-based jobs can all present hurdles. But veterans with these kinds of jobs do secure VA loans.
The bottom line is that employment scenarios can be subjective. Lender X may view your situation differently than Lender Y.
It's important to talk with a loan specialist in detail about your particular situation. Understand going in that the more stable and reliable your situation, the better.
"The VA does not determine how much you can borrow," according to the department. "However, unlike other loans, VA requires you to have enough income remaining after paying your mortgage and other financial obligations. This helps ensure you can afford homeownership and lessen the risk of defaulting on your loan."
Cash on Hand
The single biggest benefit of VA loans is the ability to purchase a home with no money down. About 80% of VA buyers take advantage of this significant financial opportunity.
Buyers can also ask a seller to cover all of their loan-related closing costs and contribute up to 4% of the loan to cover additional expenses. Some VA homebuyers ultimately won't spend any money out of pocket to close on their loan.
Read More: 3 Simple Steps to Improve Your Credit Score
Why You Should Have Cash on Hand
But successful VA borrowers will have some cash on hand to begin the process. You'll typically put down a good faith deposit -- known as earnest money -- with your offer on a home.
You'll also need to cover the cost of the appraisal, and you'll absolutely want to pay for a home inspection. Appraisal costs can vary by region.
VA buyers can look to recoup most of these costs at closing. Talk with your loan specialist about what kind of money you might need up front and what you can likely get back.
Getting Preapproval for a VA Loan
Getting preapproved for a VA loan is a critical step, and one that successful VA homebuyers know well.
This is a more involved step than prequalification. There's more paperwork, documentation and verification regarding your income, employment and assets.
The result is a preapproval letter, which will give you a clear sense of your purchasing power. It will also show sellers and real estate agents you're a serious homebuying candidate.
Some real estate agents won't accept purchase offers without a preapproval letter. Talk with a Veterans United loan specialist about getting preapproved for a VA loan.
How to Get Preapproved for a VA Loan
In general, you may be eligible for VA loan benefits if you didn't receive a dishonorable discharge and you meet the minimum active-duty service requirement based on when you served.
Once you feel comfortable with your credit score and feel you have a handle on your financial situation, begin shopping around for a VA-savvy lender. A good lender can help you apply for a certificate of eligibility (COE).
The lender will complete an application and help you determine the mortgage amount you qualify
for. Once prequalified or preapproved, a realtor can show you homes within your price range.
Having a VA-Savvy Agent
VA loans are specialized mortgage products that require specialized knowledge. These aren't an everyday transaction for a lot of lenders and real estate agents.
Successful VA homebuyers often connect with agents who understand the power and potential of this program. Agents who truly know the VA loan program can make a big difference for their buyers.
VA-savvy agents can help borrowers avoid properties that might prove problematic for the VA appraisal. They also help veterans craft contracts that maximize the VA loan program's financial benefits.
Each lender has his or her own set of requirements, so it's smart to shop around for one who meets your financial and homebuying needs.
A Veterans United loan specialist will look to connect you with a real estate agent through Veterans United Realty, a member of the Veterans United family of companies, with a national network of more than 5,000 agents who know VA loans and work routinely with military homebuyers.
What to Look for in a Real Estate Agent
Remember that a real estate agent is a person you are hiring. They work for you and should put your interests first.
With your preapproval letter in hand, you're ready to begin interviewing real estate agents to find one to
represent you in the homebuying process.
In some cases, this order may be the opposite. You may have started with the real estate agent you wish to work with, and the agent recommends a local lender who provides VA loans and advises prospective homeowners.
Either way, to find a good real estate agent, start by asking people you trust: friends, family and others. They may be able to recommend an agent they worked with themselves and had a good experience with.
Choose an experienced agent with knowledge of the neighborhoods or type of neighborhoods you prefer, as well as homes of the price range you need and the style you prefer.
Make sure your agent is a buyer's agent who gives you a disclosure of who he or she represents before having any discussions about the transaction. You'll want an agent who represents your interests and not any conflicting interests.
Take the Next Step
If you're ready to move forward, or just want more information about VA loans, the first step is to get no-obligation rate quotes.
Veterans United Home Loans, NMLS # 1907, 1400 Veterans United Drive, Columbia, MO 65203, nmlsconsumeraccess.org Equal Housing Opportunity, not endorsed by the VA or any government entity.
Chris Birk is the director of education for Veterans United Home Loans and the author of "Book on VA Loans: An Essential Guide to Maximizing Your Home Loan Benefits." More than 270,000 people follow his VA Loans Insider community on Facebook.