The VA home loan program has some of the most flexible and forgiving qualification criteria of any mortgage program available today.
But the truth is that not all borrowers who apply for the program get approved. A small percentage of applicants end up getting denied for VA loans, and for a number of reasons.
Today, we will explore some of the common factors that lead to VA loan denial, and what you can do to avoid them.
5 Issues That Can Cause VA Loan Denial
This article is not meant to dissuade or discourage you from applying for a VA loan. As mentioned above, this is one of the easiest types of mortgage loans for borrowers to qualify for, thanks to the government backing that’s involved.
The purpose of this guide is to explain some of the reasons why a VA loan might be denied, so you can take steps to avoid it happening to you.
1. The borrower has a very low credit score
The Department of Veterans Affairs does not set a minimum credit score for home buyers seeking a VA loan. They leave that up to the mortgage lender to decide.
Compared to a traditional or conventional mortgage product, VA loans typically have a lower credit score requirement. So you don’t need flawless or perfect credit to apply for the program and qualify.
In fact, borrowers who have been turned down for conventional financing in the past often find that they can get approved for a VA loan.
But there are cases where a borrower’s credit score is simply too low to qualify for mortgage financing, regardless of the program being used. This is one of the factors that can cause a VA loan application to be denied.
Most mortgage lenders that offer VA loans prefer to see a credit score of 600 or higher. But that number is not written in stone. If an applicant is otherwise well qualified for the program, the lender might make allowances for a relatively low credit score.
How to avoid it: You can maintain a good credit score by paying your bills on time and reducing your outstanding debts. Your “payment history” weighs more than any other individual factor when it comes to credit scoring. So be sure to pay those credit card bills and car payments on time.
2. The borrower has insufficient income
VA loans can also be denied due to the borrower having insufficient income. This is one of the most important checkpoints during the mortgage application and underwriting process.
When you apply for a VA home loan, the lender will review your income situation to make sure you earn enough money to manage your monthly payments. Ideally, you’ll be able to cover your monthly housing costs and other recurring expenses, while still having some “residual income” left over each month.
If a borrower does not have stable and sufficient income to repay their debt obligations, they could be turned down for a VA loan.
How to avoid it: To find out if you have sufficient income, just reach out to a VA-approved mortgage lender. They can review your financial situation to determine if you’re a good candidate for the program. It’s better to ask up front than to have your VA loan application turned down due to insufficient income.
3. The borrower can’t afford their closing costs
One of the great things about the VA loan program is that it allows eligible borrowers to purchase a home with no down payment whatsoever. But you’ll still have to pay closing costs to complete your purchase, and these can add up to thousands of dollars.
Mortgage lenders review bank statements and other financial records to determine how much money a borrower has. They do this to make sure you have the funds needed to cover your closing costs and other purchase-related expenses. If a person lacks these funds, they could be denied for a VA loan.
How to avoid it: Start saving as soon as possible. Establish a housing fund and make regular contributions. Set up a separate bank account if necessary, and consider using automatic transfers from checking to savings. You might also consider using gift money from an approved donor, such as a family member, to help cover your closing costs.
4. The home requires too much work to be habitable
The Department of Veterans Affairs maintains a list of minimum property requirements for homes purchased with a VA loan. Most of these requirements have to do with basic health and safety items, rather than minor “nitpicky” issues.
If a home has serious problems or needs extensive work just to be habitable, it probably won’t qualify for VA mortgage financing. In that case, the VA loan could be denied even after the borrower has been initially approved.
How to avoid it: When house hunting, focus on homes that are in decent condition rather than fixer-upper properties. The house doesn’t need to be brand new or in immaculate condition. It just needs to be habitable without any serious issues that would be difficult to repair.
5. The borrower will end up carrying too much debt
The debt-to-income (DTI) ratio is another important qualification criteria for borrowers applying for a VA loan. If the lender determines that the borrower has excessive debt relative to their income, they might be denied for a VA home loan.
Mortgage lenders are concerned with debt because it affects a borrower’s ability to successfully repay their home loan obligation. Having too much debt could also lead to financial distress for the borrower, and nobody wants that.
According to the Department of Veterans Affairs: “The debt-to-income ratio determines if you can qualify for VA loans. The acceptable debt-to-income ratio for a VA loan is 41%.”
But here again, that number is not set in stone. If the mortgage underwriter can determine that the borrower has favorable compensating factors, they might allow a DTI ratio as high as 50%.
The key point here is that excessive debt could cause a borrower to be denied for a VA loan.
How to avoid it: The obvious solution to a high debt level is to work on paying down those debts. That might be easier said than done. But any efforts you make in this area can improve your chance for VA loan approval, while improving your quality of life at the same time.