VA Guidelines Versus Overlays On VA Home Loans

In this blog, we will discuss and cover VA guidelines versus overlays on VA loans. Mortgage borrowers should understand the difference between VA agency guidelines versus lender overlays. The Department of Veterans Affairs is the federal agency that creates and sets the lending guidelines of the VA. As long as the borrower meets the agency guidelines of the VA, they are eligible to qualify for a VA loan.

What Are Lender Overlays on VA Loans

Every individual lender can have its own lending requirements that are above and beyond the agency guidelines of the Veterans Administration. This higher lending requirement is called lender overlays. It is perfectly legal for a lender to have higher lending requirements that surpass the minimum agency lending guidelines of the VA. This is why not every lender has the same lending requirements on VA loans.

VA Lenders with No Lender Overlays

If you meet the minimum agency guidelines of the VA, you can qualify for a VA loan with a lender with no lender overlays.  You can get denied for a VA loan by one lender and get approved with a different lender without lender overlays. Gustan Cho Associates has no lender overlays on VA loans.

VA Loans For Bad Credit

VA Loans With Bad Credit

VA loans is a government-backed residential mortgage loan program only available to active and retired members of our Armed Services with valid COE.  Surviving spouses of qualified veterans are also eligible for VA Loans. VA Loans are originated, processed, underwritten, funded, and serviced by private lenders. Lenders love originating VA Loans due to the government guarantee. For borrowers who default and foreclose on their VA Loans, the U.S. Department of Veterans Affairs will partially guarantee the loss sustained by lenders.

Can You Qualify For VA Loans with Bad Credit?

Borrowers can qualify for a VA loan with prior bad credit. VA does not have a minimum credit score requirement. There is no maximum debt to income ratio cap on VA loans. Gustan Cho Associates has qualified, approved, and closed borrowers with 500 credit scores and over 65% debt to income ratio on VA loans. Outstanding collections and charged-off accounts do not have to be paid off. However, timely payments on all the borrower’s monthly payments in the past 12 months are normally required to get an approve/eligible per the automated underwriting system. You do not need perfect credit to qualify for a VA loan. This is why lenders can offer 100% financing and very low mortgage rates on VA loans.

Choosing VA Lender With Bad Credit

Many borrowers do not understand the concept of VA Guidelines Versus Overlays. What is the difference? All lenders need to meet minimum VA guidelines set forth by the Department of Veterans Affairs. However, each lender can have lending standards above and beyond those of VA. These additional lending requirements and standards are called lender overlays.

Why Do Lenders Have Different Lending Requirements on VA Loans?

This is the reason why every lender may have different VA lending guidelines. Gustan Cho Associates is one of the very few national lenders with no overlays on VA loans. We do not have any overlays period on VA loans. As long as borrowers meet minimum VA Guidelines and get an approve/eligible per automated underwriting system, we will approve and fund the VA loan.

Over 75% of our borrowers at Gustan Cho Associates Mortgage Group are folks who either have gotten a last-minute mortgage denial or are stressing over their VA Mortgage Process with another lender. VA loan guidelines are set by the Department Of Veteran Affairs.

Typical Lender Overlays

Typical Lender Overlays

There is a big difference between VA Guidelines Versus Overlays. It is important for borrowers with less than perfect credit to understand VA Guidelines Versus Overlays. Most lenders have overlays on VA Loans. VA does not have a minimum credit score requirement. The Department of Veterans Affairs does not have a maximum debt to income ratio requirement. However, most lenders require a 620 to 640 credit score on VA Loans.

VA Lender Overlays on Debt to Income Ratio

Most lenders will have a debt-to-income ratio cap set between 41% to 50% when the VA does not mandate a DTI cap. The Team at Gustan Cho Associates recently closed a borrower with a 580 credit score and 60% DTI. This is because we got an approve/eligible per automated underwriting system. The borrower has plenty of residual income and very low DTI. Outstanding collections and charged-off accounts were seasoned for over 24 months. This borrower was viewed very favorably by the automated underwriting system that it rendered an automated approval. Other lenders have overlays on not being able to do manual underwriting. A large percentage of our business at Gustan Cho Associates are VA and FHA Manual Underwriting borrowers. 

VA Manual Underwriting Guidelines

VA and FHA loans are the only two loan programs that allow manual underwriting.  There are times when the Automated Underwriting System (AUS) findings cannot render an approve/eligible.  When the AUS renders a refer/eligible per AUS, the file can be downgraded to manual underwriting. There is no debt to income ratio caps if the borrower gets an AUS Approval. However, there are DTI Caps on VA manual underwriting. The maximum VA debt-to-income ratio for manually underwritten loans with no compensating factors is 41%. The DTI can go up to 50% with compensating factors.

What Factors Can Be Used As Compensating Factors on VA Loans

Some examples of compensating factors include the following:

  • timely credit history for 24 or more months
  • conservative utilization of credit by borrowers
  • substantial residual income
  • low debt to income ratios
  • job longevity
  • reserves and liquid assets
  • sizable down payment
  • equity in homes in the past and history of savings
  • little to no payment shock (5% or less payment shock and/or less than $100)
  • child care tax credits
  • benefits from the military
  • history of homeownership experience
  • other factors that provide strength and ability to repay the borrower
  • Established credit tradelines
  • Verification of rent with low payment shock

VA Guidelines On Bankruptcy And Foreclosure

VA Guidelines On Bankruptcy And Foreclosure

There are mandatory waiting periods after bankruptcy and/or housing events to qualify for VA Loans:

  • Chapter 7 bankruptcy must be discharged for 2 years
  • Allowed to purchase in chapter 13 bankruptcy repayment plan with a 12-month satisfactory payment history with Trustee Approval
  • Chapter 13 does not need to be discharged
  • There is no waiting period after the Chapter 13 Bankruptcy discharged date
  • 2 years from the date of the trustee’s deed after foreclosure and/or deed in lieu of foreclosure
  • 2 years from the short sale date

Borrowers who need a VA Lender licensed in 48 states with no overlays, please contact us at Gustan Cho Associates at [email protected] Or call and/or text us at 262-716-8151. The Team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays.

This BLOG On VA Guidelines Versus Overlays Was PUBLISHED On February 15th, 2022

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