VA lender guidelines
Historically, VA loans have solidly outperformed all other mortgage types with regard to delinquency rates. Whether compared to other government-backed home loan programs such as FHA or USDA or conventional programs underwritten to Fannie Mae or Freddie Mac rules, VA loans shine.
VA loan programs do have different loan approval guidelines than other programs but while a bit different in some regards, they’re similar. VA borrowers still have to have a particular credit score and debt ratios must be in line, just as other loan programs do. For instance, a VA debt ratio limit is 41 while an FHA loan has two ratios to follow. Similar but different.
As long as the VA lender applies established VA guidelines when evaluating a VA loan application, should the loan ever go into default, the VA lender is entitled to compensation from the VA.
Sometimes though, a lender can add an underwriting guideline in addition to those set by the VA. These additional guidelines are called lender “overlays” and are layered on top of existing VA underwriting rules.
For example, a borrower has a VA home loan and wants to refinance using a VA streamline program. The VA streamline program is so-called due to the reduced amount of documentation the loan requires and doesn’t verify typical borrower characteristics such as income or employment.
VA streamline loans don’t require an appraisal, for example. But a VA lender might. Lenders are required to use VA guidelines when approving a loan and can’t ignore or skirt any of the requirements if the lender wants to keep the VA guarantee in check. But the VA lender can add additional layers of qualification and as long as the lender applies the additional requirement equally among all loan applicants they’re free to do so.
This means a borrower can be declined at one VA lender but might be approved at yet another. If your VA home loan has been declined or is having a problem getting an approval; find out if it’s due to a VA requirement or an overlay. If it’s an overlay, find a VA lender that doesn’t have the same requirements.