VA Loan Prequalification

VA loans provide veterans an outstanding path to homeownership. However, before actually purchasing a home with one of these loans, veterans should understand the prequalification process. As such, we’ll use this article to outline how VA loan prequalification works.

Specifically, we’ll discuss the following:

• VA Loan Overview
• What is Loan Prequalification?
• VA Loan Prequalification, Part 1: Loan Information
• VA Loan Prequalification, Part 2: Employment Status and Income
• VA Loan Prequalification, Part 3: Financial Assets
• VA Loan Prequalification, Part 4: Credit Information
• VA Loan Prequalification, Part 5: Debt-to-Income Ratio
• The Lender’s Decision and What Happens after Prequalification

VA Loan Overview

Prior to discussing VA loan prequalification, we need to provide an overview of the loan itself. Administered by the Department of Veterans Affairs, the VA loan program provides veterans an affordable path to homeownership. Of note, the VA loan offers the following tremendous benefits:

• No down payment required
• No private mortgage insurance (PMI) required
• Low interest rates
• Streamlined refinancing option via the Interest Rate Reduction Refinance Loan (IRRRL)

However, it’s important to note that the Department of Veterans Affairs does not actually lend VA loans. Rather, the VA guarantees a portion of each home loan issued by a VA-approved lender (e.g. banks, credit unions, mortgage lenders, etc.). In other words, if a veteran defaults on a loan, the VA will reimburse a portion of the outstanding loan balance to the lender. This reduces the risk for these lenders, which is a large part of the reason why they can offer the above advantageous loan terms.

What is Loan Prequalification?

Once you decide you want to purchase a home, you’ll need to get prequalified for a mortgage loan. This represents the first step in the mortgage approval process. During this stage, you provide the lender with an overview of your financial situation and desired loan, and the lender will tell you a tentative loan amount it is willing to issue you. For example, after reviewing your submitted information, a lender may tell you that you’ve prequalified for a $250,000, 30-year VA loan at a certain interest rate.

Unfortunately, many veterans confuse loan prequalification with loan approval. Of note, prequalification only includes self-reported information. You provide the lender a bunch of information, the lender reviews this information, and they say how much they’ll lend you assuming that all of your reported information is accurate. Continuing the above example, if you mistakenly provided inaccurate information about your current income, your lender may only approve you for a $200,000 loan – not the $250,000 loan for which you initially prequalified.

As a result, prequalification is a quick process to give you a sense of what you’ll be able to borrow. It does not mean you’ll definitely be able to borrow that much money. Prior to actually approving a loan, a lender will need to independently verify all of the information you’ve provided during prequalification – a far more time-intensive process.

Due to its quick nature, mortgage prequalification also serves as a great way to compare lenders. Most lenders allow you to complete a prequalification online, and you typically hear the results within a day or two. With this information, you can compare loan terms to see what option best suits your situation.

Every VA-approved lender will have its own unique prequalification process. But, each one will require you to submit the following information in some form.

VA Loan Prequalification, Part 1: Loan Information

Before providing prequalification for a loan, lenders need to know the details of your requested loan. For veterans, you’ll need to state that you’re seeking a VA loan, as this will have different requirements than other mortgage products (e.g. conventional mortgages, FHA loans, etc.). Additionally, you’ll need to state how much you’re requesting to borrow and how long you’d like to repay it.

For example, a veteran could ask to be prequalified for a $250,000, 30-year VA loan.

VA Loan Prequalification, Part 2: Employment Status and Income

Income plays a major role in the entire mortgage approval process. Simply put, lenders want to confirm you make enough money to cover your loan payments every month. Accordingly, during the prequalification process, you’ll report all sources of income. Common income sources include salaries, military retirement pensions, and disability pay. However, borrowers can also qualify with investment income, self-employment income, and any other form of regular income.

For veterans with full-time jobs, lenders will also typically consider length of employment. Longer periods with the same employer suggest job stability, which makes lenders view you as a more reliable borrower.

VA Loan Prequalification, Part 3: Financial Assets

In addition to income, most lenders will require you to report all of your financial assets. These could include savings accounts, brokerage accounts, or retirement accounts. Lenders want to see this information for two main reasons. First, even with VA loans, you’ll need to pay some money out-of-pocket during the loan closing process. Lenders want to make sure you can access cash to cover these needs.

Second, having access to cash from these accounts makes you a more reliable borrower. For example, if you have $50,000 in savings and get fired from a job, you can still make your mortgage payments for a while. Conversely, without any savings, any loss of income will disrupt your ability to make regular loan payments.

VA Loan Prequalification, Part 4: Credit Information

Some lenders will request your permission to conduct a credit check during the prequalification process. However, most will use your self-reported information here, choosing to do the actual credit inquiry once you decide to continue the loan application process.

Regardless which of these paths lenders take, they’ll request information about your credit. This will generally include a credit score and whether you have any judgments or bankruptcies in the past. Of note, the VA does not mandate a minimum credit score. However, most lenders will want to see a FICO credit score of at least 660. Having a lower credit score won’t necessarily disqualify you, but it may make the VA loan process more difficult.

VA Loan Prequalification, Part 5: Debt-to-Income Ratio

With the info you’ve provided, the lender will calculate your debt-to-income ratio, or DTI. This number provides lenders a quick snapshot of your ability to repay a loan. To calculate DTI, lenders take all of your monthly debt payments (including your future mortgage payment) and divide it by your gross monthly income.

Conceptually, the higher your DTI, the more of your monthly income you need to make debt payments. Therefore, most lenders want to see a DTI of 40% or less. However, like credit scores, flexibility exists here, depending on your overall financial situation.

The Lender’s Decision and What Happens after Prequalification

In the past, lenders would go through your submitted information by hand to decide whether you met prequalification requirements. Today, most lenders use an online algorithm to quickly determine whether you’ve prequalified and for what loan amount.

However, prequalification is only the first step in the loan application process. As stated, prequalification only involves borrower-submitted information. Next, borrowers must seek lender preapproval. To preapprove you for a VA loan, lenders will need to independently verify all the information you submitted during the prequalification process. In addition to running a credit check to confirm your credit score and outstanding debt, you’ll need to submit documentation verifying all of your reported income. Depending on the type of income, this documentation could include W-2s, tax returns, pension or disability payment verification, and any number of other forms.

Once preapproved, you can move forward with the homebuying process confident in your ability to secure a VA loan.

Maurice “Chipp” Naylon spent nine years as an infantry officer in the Marine Corps. He is currently a licensed CPA specializing in real estate development and accounting.