VA HOME LOAN ELIGIBILITY PART 2

A Closer Look at VA Jumbo Loans

VA jumbo loans offer veterans and military buyers significant benefits, especially compared to the conventional jumbo landscape. 

First, let’s define “jumbo.” While VA loans operate under their own rules regarding county-specific VA loan limits, most lenders still consider anything above $453,100 to be a jumbo loan. VA loan limits in the continental United States top out at $679,650. 

Regardless of the VA’s county loan limit, anytime a veteran wants a loan greater than $453,100, they’re likely looking at jumbo financing. 

That $453,100 figure represents the “conforming” loan limit for conventional loans. Remember, too, that the VA loan limits don't represent a cap on your purchasing power -- rather, they help determine how much you can borrow before needing to put money down. 

VA Jumbo Loan Guidelines 

Borrowers will usually encounter tougher credit and underwriting requirements for VA jumbo loans compared to a conforming VA loan. 

You may need enough cash reserves to cover a certain number of months’ worth of mortgage payments. 

Jumbo guidelines will vary depending on the lender, the size of the loan and other factors. But they’re often considerably more lenient than what veterans and military buyers will need for conventional jumbo loans. 

VA Jumbo Loan Down Payments 

Whether you need a down payment for a VA jumbo loan will depend on a couple things, chiefly the county loan limit and how much VA loan entitlement you have. A veteran with full entitlement wanting to purchase a $500,000 home in a county where the loan limit is $525,000 doesn’t have to worry about a down payment. The loan size is definitely in jumbo territory, but it’s also below the VA county loan limit. 

Now, let’s say that same veteran decides to purchase a $600,000 home. Because that’s above the $525,000 county loan limit, the borrower in this case would need to make a down payment. The down payment in situations like this needs to be at least 25 percent of the difference between the loan limit and the loan amount. 

[($600,000-525,000) = $75,000] x 25 percent = $18,750 

The veteran would need a down payment of $18,750 in order to move forward. That’s about 3 percent of the loan amount. 

For a conventional jumbo loan, it’s not uncommon for buyers to need 10 or 20 percent down, which would be anywhere from $60,000 to $120,000. Needless to say, that’s a huge benefit of VA jumbo financing. 

Keep in mind the required down payment can increase significantly if you’ve already used some of your loan entitlement and it can’t be restored, either because you currently have a VA loan or you lost a VA-backed mortgage to default. 

But between the more relaxed guidelines and down payment setup, VA jumbo financing can offer a tremendous purchasing opportunity for qualified borrowers. 

A Closer Look at the VA Funding Fee

The VA Funding Fee is a governmental fee applied to every VA purchase and refinance loan. This fee goes directly to the Department of Veterans Affairs to help cover losses and keep the loan guaranty program running for future generations of military homebuyers. 

The fee changes depending on several factors, including the nature of the borrower’s service, whether the borrower has used the benefit before, the type of loan and whether there’s a down payment. Regular military members pay slightly lower funding fees than Reservists and National Guard members. 

Borrowers with service-connected disabilities and select others might not have to pay it at all. 

This fee is due at your loan closing. Lenders will collect and send the funding fee payment to the VA through an automated system. Mortgage lenders have no control over a borrower’s eligibility for the funding fee or what they’re required to pay. 

VA Funding Fee for Purchase Loans 

Active duty and veteran buyers with Regular Military service will pay a little less than Reserve and National Guard buyers when they’re using this benefit for the first time. 

Contributing a down payment decreases the funding fee for both first-time and repeat VA borrowers.

Funding Fee Table for VA Purchase Loans for Regular Military veterans 

Service Down Payment 1st Use After 1st Use 

Active Duty None 2.15% 3.3% 

- 5% or more 1.5% 1.5% 

- 10% or more 1.25% 1.25% 

Reserves/Guard None 2.4% 3.3% 

- 5% or more 1.75% 1.75% 

- 10% or more 1.5% 1.5% 

VA Funding Fee for Refinance Loans 

The VA has two refinance products: The Interest Rate Reduction Refinance Loan (IRRRL) and the Cash-Out refinance. The funding fees differ significantly between them, in part because of their objectives. 

The IRRRL exists to get current VA homeowners into a lower-rate mortgage or out of an adjustable-rate loan. The Cash-Out refinance allows qualified veterans to refinance and extract cash from equity. 

The funding fee breakdown for a Cash-Out refinance is similar to a VA purchase loan. Borrowers cannot lower their funding fee by making a down payment or using equity. 

Mortgage lenders will verify your funding fee status during the loan process. The Certificate of Eligibility will usually indicate whether or not the borrower must pay the VA Funding Fee. 

VA buyers can ask the seller to pay this fee on their behalf, pay it in cash or finance it into their loan. Veterans getting a VA refinance can pay the fee out of pocket or finance it over the life of the loan. 

Most VA borrowers who are required to pay it choose to finance the VA Funding Fee, which on a VA purchase is the only closing cost you can roll into the loan. 

VA Funding Fee Exemptions 

Those who do not have to pay the VA Funding Fee include Veterans who: 

- receive compensation for service-connected disabilities 

- would receive disability compensation if they didn’t receive retirement pay 

- are rated as eligible to receive compensation on the basis of a pre-discharge exam or review 

- can but are not receiving compensation because they’re on active duty 

Borrowers who have a disability claim pending at the 'me of closing are required to pay the funding fee. If the veteran is awarded disability compensation after the loan closes, it may be possible to obtain a refund of the VA Funding Fee. 

Uncommon Funding Fee Scenarios 

When two veterans with VA loan entitlement get a loan together, the funding fee is still in play. But it can wind up working a bit differently in these relatively uncommon cases. A major consideration is who’s contributing VA loan entitlement. 

If two veterans are each contributing entitlement but one of them is exempt from paying the funding fee, the funding fee on their loan is cut in half. If this same set of veterans is seeking a VA loan but the veteran who’s exempt is not contributing entitlement, then their loan would carry the full funding fee. 

In the rare instance where two veterans are each contributing entitlement and using the benefit for the first 'me, but one is a Regular Military veteran and the other is a National Guard or Reserve veteran, the funding fee would be 2.275 percent. That’s the average of their respective first-'me funding fee charges (2.15 percent and 2.4 percent). 

Last, VA loan assumptions come with a 0.5 percent funding fee. 

Character of Discharge 

Acceptable VA Loan Uses 

Let’s take a closer look at some of the acceptable and unacceptable uses of VA loans. 

Acceptable uses include: 

• Single-family home -- Single-family homes are a great option for a multitude of buyers, and they’re the most commonly purchased property of VA loan recipients. 

• Condominium -- Condo developments need to be approved by the VA. 

• New construction -- The VA also allows for a $0 down loan to build a new home, but a more common approach is to obtain a construction loan from a builder and then refinance the short-term loan into the VA program. 

• Manufactured home -- the VA does allow for manufactured homes, but it’s difficult to find VA lenders willing to finance these properties. We know of lenders that DO allow for VA loans on manufactured homes. 

• Modular home -- These are not the same as a manufactured, or mobile, home. Mobile homes are built to national HUD standards and have a HUD identification tag. Buying an existing modular home is treated the same as any other stick-built home. 

• Multi-unit property -- Buyers can purchase up to four one-family residential units in a multi-unit property. At least one of those units must be used as the buyer’s primary residence. 

Unacceptable uses include: 

• Investment property -- Veterans cannot use VA financing to purchase a home solely as an investment property. 

• Business loan -- VA loans can’t be used to purchase a storefront, office space or any other non-residential properties. 

• Unimproved land -- Veterans can’t use VA loans to purchase bare land or farm ground that does not contain the borrower’s primary home. You also can’t buy land with the intent of someday putting a house on it. 

• Abroad -- VA loans can only be used for properties in the United States and its territories, which include American Samoa, Guam, the Northern Mariana Islands, Puerto Rico and the U.S. Virgin Islands. 

It’s important to know that lenders are free to add their own property restrictions to this list. For example, many VA lenders won’t offer financing for manufactured homes. Others will decline to lend on properties like a working farm or a geodesic dome. Acceptance or denial from one lender does not necessarily translate into acceptance or denial from all lenders. 

VA Adaptive Housing Grants 

Disabled veterans may have distinct needs when it comes to housing. The VA has two grant programs that can help veterans with certain permanent and total service-connected disabilities build or modify a home to best meet their needs. One is the Specially Adapted Housing (SAH) grant, and the other is the Special Housing Adaptation (SHA) grant. The maximum dollar amount available for these grants is set by law but can change annually depending on construction costs and other factors. Veterans interested in exploring the SAH and SHA grants can apply online through the VA's eBenefits portal or contact their nearest VA regional office (1-800-827-1000) for more information. 

Getting a VA Loan After Bankruptcy

Bankruptcy and foreclosure can be harrowing experiences. But they don’t have to ruin your financial future or your dream of buying a home. Qualifying for a VA loan after bankruptcy is certainly possible, often in a shorter time frame than you would need for a conventional loan. 

But make no mistake: It’s not always a quick or easy road. A bankruptcy can cause your credit score to drop anywhere from 130 to 240 points, according to credit scoring firm FICO. It can take from three to 10 years for a consumer’s credit score to fully recover. 

The good news for VA borrowers is that the credit score hurdle is typically lower than what you’ll need for conventional or even FHA financing. 

Lenders will usually have a “seasoning period” for borrowers who have experienced a bankruptcy. This is basically how much time you must wait before being able to close on a home loan. 

The seasoning period can vary depending on a host of factors, but a big one is the type of bankruptcy you experienced. 

Chapter 7 Bankruptcy 

A Chapter 7 bankruptcy is known as a “liquidation” bankruptcy and forces an individual to sell certain assets in order to repay creditors. You will typically need to wait at least two years from the date of a Chapter 7 discharge to qualify for VA loan approval. 

Chapter 13 Bankruptcy 

A Chapter 13 bankruptcy is known as a “reorganization bankruptcy” and creates a court-supervised plan for debt repayment. You may be eligible for a VA loan once you’re 12 months removed from filing for Chapter 13 bankruptcy protection. Prospective borrowers will usually need approval from their Chapter. 

Bankruptcy with a Mortgage 

Homeowners who go through a bankruptcy may want to try and keep their home through a process known as “reaffirmation.” Doing this means you will continue to be responsible for your mortgage payment. Talk with an attorney about reaffirmation and its implications for your financial situation before making a final decision. 

With a Chapter 7 bankruptcy, homeowners who do not reaffirm will see their legal and financial responsibility for the mortgage end with the discharge. But there’s still a lien on the property, and it can take months or years for lenders to foreclose. It’s possible for some prospective borrowers to continue living in the home a after the bankruptcy discharge. 

In cases like these, some lenders may require a Verification of Rent (VOR) to verify borrowers have continued to make monthly mortgage payments. Guidelines and policies on this can vary by lender. 

Chapter 13 Homeowners 

For Chapter 13 homeowners, the bankruptcy can’t fully discharge mortgage debt. Lenders will want to know more about your mortgage payment history over the previous 12 months.

Getting a VA Loan After Foreclosure

Going through foreclosure can devastate your credit score. Consumers could see their scores plummet by as many as 160 points following a foreclosure, according to credit scoring firm FICO. It can take years -- even a decade -- for a prospective borrower’s credit profile to fully recover. But it doesn’t mean you have to wait years and years to buy another home after experiencing a foreclosure. 

The good news is the VA loan’s more flexible credit requirements allow qualified veterans to bounce back significantly faster after a foreclosure than buyers seeking conventional financing. 

Foreclosure Seasoning Periods 

Foreclosure is essentially a legal process where the lender takes back their collateral. In some states it involves going to court, while other states don’t require a judge’s involvement. 

Rather than go through the time and money it takes to formally foreclose, some lenders may offer alternatives to foreclosure, such as deed-in-lieu of foreclosure or a short sale. 

A deed-in-lieu of foreclosure occurs when homeowners are allowed to deed the property back to the lender rather than endure full foreclosure proceedings. With a short sale, a lender is allowing you to sell the home for less than you owe. 

Each of these can carry its own required waiting period, which you might also hear called a “seasoning period.” This means you’ll need to wait a certain number of months or years before being able to obtain another home loan. 

Foreclosure & VA Loan Entitlement

VA loans continue to exhibit one of the lowest foreclosure rates on the market, but defaults do occur. 

Borrowers who’ve lost a VA loan to foreclosure will have reduced VA loan entitlement, which will limit how much they can borrow without making a down payment. However, that previous foreclosure doesn’t automatically preclude them from using this hard-earned benefit again once they’re past the two-year mark. 

Some borrowers may have some basic VA loan entitlement remaining, while others may be able to purchase again using their second-tier entitlement. 

When the 'me comes, lenders will consult a borrower’s Certificate of Eligibility to help determine how much entitlement is remaining. 

That, along with where in the country you’re buying, will help lenders calculate how much you can borrow before possibly needing a down payment. 

Non-Allowable Fees on VA Home Loans

Closing costs are always part of the mortgage equation. But one of the big benefits of VA loans is that they limit what veterans and military members can pay in closing costs. In fact, VA buyers are barred from paying some costs and fees in certain cases. Part of it depends on what approach the mortgage lender is taking. 

Generally, in any VA transaction the veteran borrower can pay: Reasonable discount points to lower the interest rate, plus reasonable amounts for itemized fees and charges allowed by the VA, and a flat 1 percent fee charged by the lender. 

The 1 Percent Fee 

This flat 1 percent fee is designed to cover the lender’s costs associated with originating, processing and underwriting the loan. If the lender is charging the 1 percent fee, they are not allowed to tack on additional charges for things the VA basically considers overhead. 

If your lender is charging the flat fee, there’s a host of things you cannot pay for, including: 

• Loan application or processing fees 

• Interest rate lock-in fees 

• Document preparation fees 

• Lender appraisals 

• Postage costs 

• Escrow or notary fees 

• Tax service fees 

• Loan closing or settlement fees 

• And more 

The lender must cover these costs out of that flat 1 percent charge. While using this flat fee is common, lenders can also choose to take a more piecemeal approach. And if they do that, VA buyers can wind up paying costs and fees that would otherwise be unallowable. 

For example, on a $200,000 loan, a lender could charge a $1,500 origination fee and then charge another $500 in unallowable fees, like a loan application fee or a document preparation fee. 

But there’s one important catch for lenders with this piecemeal approach: The total of all those individual charges still can’t exceed 1 percent of the loan amount. So, in our example, the most the lender can charge is $2,000 -- whether it comes from the flat charge or a pick-and-choose approach is up to them. 

For VA buyers, the bottom line is this: Lenders can’t charge you more than 1 percent to cover their loan origination and processing costs. 

Itemized Fees & Charges 

In addition to the potential costs and fees above, VA buyers can pay reasonable amounts for certain itemized fees and charges, such as Recording Fees, VA Appraisal, etc. These are third-party charges, meaning lenders don’t have control over the amount. In some cases, like with homeowners insurance and title insurance, you may be able to shop around for the best deal among multiple providers. 

Non-Allowable Fees 

Last, let’s take a look at some costs and fees that are truly non-allowable, meaning VA buyers can’t pay them regardless of whether the lender is charging the flat 1 percent fee. 

These truly non-allowable fees include: 

• Attorney fees charged by the lender 

• Mortgage brokerage fees or broker commissions 

• Real estate broker or agent commissions or fees 

• Fees for appraisals requested by the lender or seller for a Reconsideration of Value 

• Fees for appraisals requested by anyone other than the veteran or seller 

• Fees for a flood zone determination by the lender or appraiser 

Again, these are costs and fees that a VA buyer cannot pay. But that doesn’t automatically mean the home seller has to pay these costs. Any of the other parties to the loan -- like the lender or a real estate agent -- can cover these expenses. 

When it comes to closing costs, every buyer’s situation is different. VA buyers can negotiate with the home seller to cover some or all of their closing costs. 

Common-Law Marriage & VA Loans

Common-law marriage is an old concept and an often misunderstood one. 

These are basically marriages where two people live together for a certain period of time, present themselves to family and friends as married but never actually have a wedding ceremony or obtain a marriage license. 

Most states don’t recognize these unique unions, but on occasion questions about common-law marriage do arise for veterans looking to use their VA loan benefits. 

Common-Law Marriage States 

Only about a dozen states continue to recognize new common-law marriages. A few states that have outlawed new common-law marriages still recognize older ones that have been “grandfathered in.” 

According to legal website Nolo, here’s the list of states that recognize at least some common-law marriages: 

·        Alabama, Colorado, District of Columbia, Iowa, Kansas, Montana, Oklahoma, Rhode Island, South Carolina, Texas, and Utah

Requirements for what constitutes a common-law marriage can vary by state. Couples who live together for a certain number of years -- seven is a frequent one cited -- don’t automatically become common-law spouses. 

Veterans, service members and their families can check with their applicable state office or consult an attorney for more information about common-law marriage requirements and guidelines. 

Common-Law Marriage & Down Payments 

The VA and lenders can recognize common-law marriages for home loan purposes, provided you’re buying in a state that recognizes common-law marriage and you and your spouse meet the state’s requirements. 

In addition, different lenders may have different requirements. Talk with a loan officer in more detail. 

Determining your common-law status can be critical for couples who each want to be on a VA-backed mortgage. For veterans seeking a VA loan, having a co-borrower who is neither a spouse nor an eligible veteran requires a 12.5 percent down payment. 

VA Loan Closing Costs & Fees

Like every mortgage, the VA loan comes with closing costs and related expenses. VA loan closing costs can average anywhere from 3 to 5 percent of the loan amount, but costs can vary significantly depending on where you're buying, the lender you're working with and more. For many homebuyers, closing costs are one of the most confusing parts of this entire journey. 

In fact, “closing costs” is really a catchall term. There are all different kinds of costs and fees that can be part of finalizing this process. In the mortgage world, you’ll also hear these referred to as “settlement charges.” 

Some of these costs represent the actual costs of doing a loan. Others involve expenses like homeowners insurance and property taxes. Some need to be paid before you get to the closing table, while others can wait until that day arrives. 

Who pays what in closing costs and concessions is always up for negotiation. It’s important to understand that sellers aren’t obligated to pay any costs on your behalf, but you can always request that the sellers pay a portion or all of the closing costs when you’re making a formal offer on a home. 

Closing Costs v. Concessions 

In addition to your loan-related closing costs, you can ask the seller to pay up to 4 percent of the purchase price in “concessions,” which can cover those non-loan-related costs and more. VA broadly defines seller concessions as “anything of value added to the transaction by the builder or seller for which the buyer pays nothing additional and which the seller is not customarily expected or required to pay or provide.” 

In some respects, as long as you stick to that 4 percent cap, the sky’s the limit when it comes to asking for concessions. 

VA buyers are also subject to the VA Funding Fee, a mandatory charge that goes straight to the VA to help keep this loan program running. For most first-'me VA buyers, this fee is 2.15 percent of the loan amount, provided you’re not making a down payment. Buyers who receive VA disability compensation are exempt from paying this fee. 

The funding fee is the only closing cost VA buyers can roll into their loan balance, and that’s how most borrowers approach this fee. You could ask the seller to pay it, but doing so would count against the 4 percent concessions cap. The other potential approach would be to ask the seller to lower the purchase price by whatever the fee totals. 

Closing Costs in Your Purchase Offer 

One of the early questions many borrowers have is: What are my closing costs? It’s an important question for a lot of reasons. Where things can get confusing is that lenders can only give you a rough estimate until you’ve zeroed in on a property. That’s in part because they’ll need the property address in order to estimate things like homeowners insurance, property taxes, and more. Some lenders will provide a “fees worksheet” or some other document to help give you a broad idea of closing costs. Other times, a loan officer might provide a rough estimate based on other recent purchases in that community. 

VA Construction Loans: How to Build a Home with a VA Loan

Building your dream home is a possibility with a VA home loan. But it isn’t always an easy road. 

This no-down payment program allows qualified borrowers to use their VA loan entitlement to obtain a mortgage for new construction. The VA basically insures loans, but it’s up to individual VA-approved lenders to determine what kind of loans they’ll issue. 

What’s increasingly common is that veterans secure a construction loan from a builder or a local lending institution. As the homebuilding process wraps up, qualified borrowers can turn that short-term construction loan into a permanent VA mortgage. 

Getting Construction on & Land Loans 

Getting a traditional construction loan often requires a down payment, although it may be possible to recoup that in some cases. There are also restrictions about using the VA loan to purchase land. Borrowers cannot use a VA loan to purchase unimproved land with the goal of one day building a home on the site. 

Veterans and military members who own the land they want to build on may be able to use any equity they have toward down payment requirements for construction financing. Veterans who don’t already own land can include the purchase of it in their overall construction loan. 

It’s important to understand that construction loans are short-term loans. That means it’s imperative to start working on the permanent financing as early as possible. 

Permanent VA Financing for Construction Loans 

Veterans and military members hoping to turn their construction loan into a permanent VA mortgage will need to meet the same underwriting guidelines as a veteran purchasing an existing home, from credit scores and debt-to- income ratio to residual income and more. From an underwriting perspective, there’s little difference between a VA purchase and a VA Cash-Out refinance. 

The home will need to be constructed by a builder with a valid VA builder ID. These aren’t hard to get, and it’s even possible for veterans to build the home themselves. Builders will often need to provide a one-year warranty. 

VA appraisals are required even for new construction, but the appraiser may be able to base the appraisal on the home’s plans and specifications, with a final inspection to follow once the home is built. 

These are just a few reasons why it’s important to talk with a VA lender at the beginning of the process. Lining up a construction loan is a critical step, but you’ll need to be able to turn that short-term loan into a long-term mortgage once the home is built. That’s not something you want to wait to explore. 

In summary, it is possible to use your VA loan benefits for new construction. But the process isn’t always simple or straight forward, and some buyers may need money for a down payment to get things moving. 

VA Loans & For Sale By Owner (FSBO) Homes

A home that’s labeled For Sale By Owner (FSBO) is exactly that – a property available for purchase that’s marketed by the homeowner rather than a real estate agent. For VA homebuyers, it’s important to understand the potential challenges and advantages that can come with a FSBO approach. 

Potential FSBO Advantages 

Buying a FSBO property might provide the ability to land a great deal. FSBOs typically have a lower median sales price than homes sold by real estate agents. Every property and housing market is different, but the general thinking is FSBO sellers aren’t “pricing in” the real estate agent commission. On a $200,000 home, a 6 percent commission could add $12,000 to the asking price. 

Another advantage is that some buyers and sellers find it easier to work directly with one another, rather than using an agent as an intermediary. But be cautious. “Going it alone” isn’t a smart choice for every buyer and seller. A home purchase is likely to be a buyer’s biggest financial investment. 

Potential FSBO Challenges 

Good listing agents help give homeowners an objective viewpoint. Agents help sellers understand how local market trends, available inventory and a home’s features should affect pricing. That expertise helps owners price homes appropriately and attract the right buyer. 

Real estate sales aren’t simply about open houses and advertising. They’re legal and fiscal transactions. 

FSBO sellers may not be aware of the proper legal requirements of selling a home. Or they may not know how to best address typical real estate transactions challenges, such as seller disclosures, inspection issues, appraisal problems and title insurance glitches. 

One of the most common reasons homeowners go the FSBO route is to minimize what they pay in agent commissions. VA buyers and their agents may want to see something in writing from the seller regarding commission payments before formalizing a purchase offer. 

Generally, prospective homebuyers will sign a buyer-broker agreement with their real estate agent that covers FSBO transactions. In some cases, these could obligate the buyer to pay their agent’s commission if the seller refuses. But VA loans offer an important safeguard here: The VA prohibits borrowers from paying real estate agent fees. 

Just because the seller isn’t represented by a real estate agent doesn’t mean the buyer can’t be. It’s nearly always in a buyer’s best interest to hire a real estate agent before purchasing. If you’re using a VA loan, remember that your agent’s commission must be paid by the seller. Make sure your seller and your agent are fully aware of this fact before signing a purchase contract. 

Get a CMA Before Making an Offer 

Whether buying a FSBO or an agent-listed property, all buyers should obtain a Competitive Market Analysis (CMA) before making an offer. This is a short report about the value of other homes in the area, and it’s a great tool for determining a property’s fair price. Your buyer’s agent should conduct a CMA before you make an offer. 

Don’t Skip the Inspection! 

If you decide to make an offer, don’t forget to add an inspection contingency to your contract. This little loophole gives buyers an “out” and allows you to renegotiate with the seller if the inspector discovers problems with the property. Don’t let the challenges involved with a FSBO sale limit your options. Simply prepare yourself for what’s ahead with a thorough understanding of the FSBO process. 

What VA Buyers Need to Know About Mortgage Credit Scores

More and more veterans and service members are using credit-monitoring tools and apps to keep close tabs on their credit profiles. That’s a great step to take before starting the home buying journey. Monitoring your credit reports can help identify problems that could keep you from landing a VA loan. 

But it’s important to understand that the credit scores these tools and apps provide aren’t the same scores a mortgage lender sees when they pull your credit. Needless to say, it can come as a shock when you think you have a 640 credit score, only to be told by a mortgage lender that it’s actually 615. 

In some cases, the gap may not have much of an impact. But in others, this discrepancy can mean the difference between getting prequalified for a VA loan and having to put your home buying dreams on hold. 

Generic v. Industry-Specific Credit Scores 

Consumers don’t have one credit score, in part because you don’t have just one credit profile. Some of your creditors might report your usage and payment history to all three of the nation’s major credit bureaus -- Equifax, Experian and TransUnion -- while others might report to only one or two of them. Your credit profile might look different to each of the three big credit bureaus. 

This key distinction between generic and industry-specific scoring models helps explain why a credit monitoring service might show consumers totally different scores than a mortgage lender. 

Mortgage Credit Scores 

For example, the three credit bureaus have their own generic scoring model, known as the VantageScore. Consumers who use Credit Karma see VantageScore credit scores from Equifax and TransUnion. 

But in the world of mortgage lending, FICO credit scores still reign supreme. When lenders pull your credit, they’re usually looking at FICO scores specifically formulated for mortgage lending. These are known as mortgage credit scores. 

The three credit bureaus offer different FICO formulas for mortgages, but the most common versions for lenders are: 

• Equifax Beacon 5.0 (FICO Score 5) 

• TransUnion FICO Risk Score, Classic 04 (FICO Score 4) 

Usually, lenders will get one mortgage credit score from each of the three reporting agencies and use the median (middle) score as your credit score for qualification purposes. Some mortgage lenders may have their own custom scoring models that factor the FICO mortgage scores into their overall formula. 

In either case, the mortgage credit scores are based on a different formula than the generic or educational scores consumers get from credit monitoring services. It’s common to see a difference between the two types, which can be startling and sometimes frustrating for prospective VA buyers. 

Generally, if your generic credit profile is in good shape, your mortgage credit scores will likely fall in line. Credit score benchmarks can vary, but lenders are typically looking for a 620 FICO for VA loans. If your generic scores are right at or below that cutoff, you might need to boost your credit profile before heading into the home buying process. The only way to see your mortgage credit scores is to have a mortgage lender pull them. Talk with your loan officer for more information. 

National Archives 

VA Loan Rates 

Because VA home loans are backed by the federal government, lenders have the luxury of charging competitively low interest rates. Eligible veterans and service members find that rates are generally lower with a VA home loan than a conventional mortgage. 

The VA doesn’t set interest rates. Your lender determines the rate on your VA loan based on your unique financial situation 

What Determines My Rate? 

A variety of factors, including: 

• Credit score 

• Debt-to-income ratio 

• Loan duration (15- or 30-year) 

• Current market conditions 

A good credit score almost always means a lower rate. However, even if your credit report isn't in perfect shape, you may still have an easier time qualifying for a low rate due to the VA Guaranty. 

Locking in Your VA Loan Rate 

Once you've identified the house you wish to purchase and have entered a contract for that property, your loan officer will help you figure out what the rate will look like. 

Why VA Buyers Might Need Cash Reserves

Your income and asset picture is important to the home buying journey. Lenders want to make sure you have stable, reliable income that’s likely to continue. 

Generally, there’s no minimum dollar amount you need in the bank to start the home buying process. But lenders will be on the lookout to make sure you can financially handle the new mortgage payment and the costs of closing on the loan. 

In some cases, you may need a certain amount of cash reserves to satisfy lenders. A solid stockpile of documented funds can also serve as a “compensating factor” to help buyers overcome other potential deficits or issues with their loan file. Policies and guidelines will vary by lender, loan type and other factors. 

Lenders typically think of reserves in the context of your monthly mortgage payment. You may need to have a certain number of months’ worth of mortgage payments in the bank, to include the principal, interest, property taxes, homeowners insurance (and homeowners association dues when applicable). 

Reserves for Jumbo VA Loans 

VA buyers seeking a jumbo loan may need to meet reserve requirements. A jumbo loan is a loan in excess of the current $453,100 conforming loan limit in place throughout most of the country. 

Reserves must be in the borrower’s name and can’t be a gift. But lenders may be willing to count rental income.

Using Rental Income 

Buyers looking to purchase a multi-unit property and count projected rental income toward loan qualification will typically need to have a two-year tax history as a landlord. Many times they’ll also need cash reserves. 

The same is typically true for buyers who want to count income from an existing rental property they never occupied. You’ll usually need cash reserves and to be able to document a two-year history of receiving rental income. 

Borrowers may also need to have cash reserves if they’re more than 12 months removed from converting a primary residence into a rental property. 

Talk with lenders about their policies and guidelines. 

Compensating Factors 

Borrowers may be able to strengthen their loan file with “compensating factors.” These can vary by lender, loan type and other factors, but they’re generally positive attributes that can help convince underwriters you’re a safe bet. 

For example, lenders may be willing to extend their cap on debt-to-income ratio for borrowers with one or more compensating factors. 

Intermittent Occupancy Guidelines for VA Loans

The VA’s occupancy guidelines help ensure veterans and service members are purchasing primary residences. Like the other government-backed home loans, VA loans aren’t intended for buying vacation homes, second homes or purely investment properties. 

Generally, VA buyers in most cases are expected to occupy their new home within 60 days of closing, although there are exceptions. 

Here, we’re going to focus on the concept of “intermittent occupancy,” which basically allows buyers to move forward with a VA loan even if they can’t maintain a physical presence at the home on a daily basis. 

This applies to veterans working overseas as civilian contractors, but every prospective buyer’s situation is different. Lenders evaluate occupancy scenarios on a case-by-case basis. 

Time Away for Work 

For the VA, occupancy implies the new home is within reasonable distance of the borrower’s place of employment. But there are situations where a veteran’s job requires them to be gone from home, sometimes for substantial periods of time. 

In those cases, lenders will be looking to see if the veteran has a history of continuous residence in the community. They’ll also be looking for any signs the borrower has established, intends to establish or may be required to establish a primary residence somewhere else. 

There’s no magic number or set number of days the buyer must live in the home. But lenders will want to ensure the veteran isn’t trying to purchase what’s essentially a seasonal home. 

What do you do next? 

Call or text Ron at 623-748-7572 for Arizona or 425-218-7674 for Washington or me at 360-913-4424.