Often here at VA HLC, we are asked ” What Paperwork Will You Need to Apply For A Home Loan?”.
Just a few short years ago (between 1999 and 2006), you did not need much to apply for a VA loan. To apply for a home loan, all you needed was a signature, a verbal statement of income, and an acceptable credit score. Because of the lack of paperwork, these loans were called stated income loans.
These loans were often given to borrowers who did not understand the full impact of the terms. The result has been called “the great recession”.
These loans resulted in high default and foreclosure rates. To prevent this cycle from repeating itself, new regulations have been enacted and will continue to be enacted.
A large part of these changes is the new rule that in order to apply for a home loan, you will need to provide income documentation and other paperwork as a condition to loan approval.
What this means is that for you to become approved for a home loan, you will need to provide documentation to the underwriter and investor.
Among the documents collected that are necessary to receive full approval:
1. Bank statements will be required to reflect any income not based on a paycheck or employer employee relationship.
2. A true and factual, tri-merge mortgage credit report.
3. Federal and State Tax Returns, Schedule “C’s” for those self employed.
For those receiving non-paycheck income:
Award letter for disability, alimony, child support and/or Social Security (if applicable).
Below we will briefly discuss why this is needed to apply for a government insured home loan and all types of VA loans.
Investors seek stability. Borrower stability historically results in a lower default rate than unstable borrowers. The focus on stability instead of credit score allows underwriters to approve loans with bad credit, foreclosures, and even bankruptcy. Because of this, all paperwork collected will be used to determine the borrowers stability.
Bad credit does not always mean an unstable borrower and VA HLC understands this. Remember, credit score is not the most important thing to consider when it comes to receiving government loan approval. Even if you have excellent credit all paperwork is necessary to receive loan approval.
Government Insured mortgages do require stable income that can be reasonably relied upon for 2 or more years to come.
Another item that shows stability is the credit report. The credit report shows whether or not if debt is usually paid on time. Note that bad credit will not automatically prevent a borrower to get a VA loan. Regardless of credit score, the investor will actually pull the borrowers credit several times prior to funding. The purpose is to ensure that no new debt has been obtained and to prevent mortgage fraud.
For VA loans, and most other federally subsidized mortgage debt, a strict debt ratio is not required.
Residual income is required, however. Residual income is a set amount pre-determined by government actuaries that will be needed to provide sustenance to an individual living in that area. Although a complicated concept, it may be better understood by looking at the residual income charts here.
Any and all proof of income will be considered when calculating ability to repay the loan and maintain an adequate standard of living.
Another important requirement is the restriction of increase in payment for housing. Simply put, the borrower can not have a large adjustment in payment. The purpose for this is to ensure that the borrower will not have a mortgage payment that will be a financial shock to the borrower. If a borrower is accustomed to paying $300 per month in rent and they will begin to pay $1,500 in mortgage payments, they may not be able to handle the adjustment as their standard of living will suddenly be changed.
Home loan approval is more difficult than it was a few years ago. The bright side is that with a little preparation, getting approved for a VA loan can be easy. especially those with bad credit.