Buying and owning your own home is part of the phenomena known as the American Dream. Property ownership here in these United States is emblazoned as something of a right and takes on a status like nowhere else in the world. Those with VA loan eligibility have an upper hand compared to those who don't have the VA home loan benefit and can get a piece of their own American Dream with no money down, lower closing costs and easier qualifying compared to conventional loans.
Sometimes though the dream turns a little bit scary for some and eventually a nightmare when their VA loan application is turned down. What should someone do if their VA loan application is in fact denied?
Get the Facts
When lenders decline a loan, they do so reluctantly. VA lenders make money by approving loans, not denying them so they'll do what they can to get your approval. When they can't, they'll send what is called an Adverse Action notice.
This is an official form and required by law to provide you with a written explanation of why your loan was not approved. You'll get this form in the mail but before you do, your loan officer will likely be the one who first gives you the bad news.
You need to first find out specifically, exactly why your loan was denied. Are your credit scores too low? Do you not make enough income to qualify? If your credit is impaired, you can begin the process of repairing it. If you can't afford the monthly payments then borrow less, put more down or get a longer term loan.
The key is knowing exactly the cause of your declination. Without knowing, you can't address the problem.
You know that the VA does not approve VA home loan applications directly, VA lenders do. However, the VA does establish minimum guidelines that the lender must follow. If the VA lender does in fact approve the loan using required VA criteria, the loan is eligible for the VA loan guarantee. As long as the lender followed proper underwriting protocol, should the loan ever go into default, the lender is entitled to 25 percent of the loan amount.
Lenders must make sure the borrower has established an acceptable credit history. Borrowers must be able to prove their income and have enough money in the bank to cover closing costs associated with the loan such as for an appraisal and homeowner's insurance. Whatever the VA requires, lenders must not only follow those guidelines but document the process.
However, some lenders create additional guidelines of their own on top of what the VA requires. VA lenders can't subvert VA requirements in order to approve a loan but they can add additional qualifications making it more difficult to qualify for the loan. These additional guidelines are called "overlays."
For example, while the VA doesn't have a minimum credit score requirement, most lenders have settled on a minimum credit score of 640 in order to be approved. If you get a phone call from your loan officer with the bad news that your credit score is 635 and the minimum is 640, don't think for a minute that you're a lost cause. Other lenders have a 620 requirement.
If you get declined, find out why then call other lenders to see if they have a similar overlay.
Know Before You Go
Finally, in today's world, there really is no reason to get turned down for a VA loan if you've already been preapproved. Before you ever go out shopping or consider a refinance, contact a VA lender and go over your situation.
Take a look at your income, your debts and your credit. Answer all questions before you even get to the point of making an offer on a property. Most sellers today ask for a preapproval letter before reviewing any offer anyway, so it's best to get all questions answered in advance.
If you submitted your application to a lender, supplied your documentation and your credit was reviewed, if you didn't get your approval once you found a property, it's likely your VA loan officer made a mistake somewhere or the information you provided on your application couldn't be verified.
This morning, my kids asked me about how I became interested in money. There are a couple of reasons, but we got talking about my job in mortgage banking and how I worked with delinquent borrowers and that I got to review the original underwriting on those mortgages, and that I saw a lot of […]