VA loans involve a veteran’s benefit. VA encourages lenders to make VA loans to “qualified” veterans. By definition a “qualified” veteran is one that has satisfactory credit and has present and anticipated income that allows the veteran to make all terms of repayment (VA Pamphlet 38 CFR 36.4337).
The good thing about VA loans is they allow approved underwriters to make allowances for reasonable judgment and flexibility in administering this very important veteran benefit. This is of large importance especially when the veteran cannot obtain Automated Underwriting System (AUS) approval and the loan must be “manually underwritten.” AUS approvals allow for lenders to take less risk and submit in much less paper work than a “manual underwrite.” It is very important that you work with a lender that has no overlays when it comes to VA loans.
Underwriters main concerns are to verify that the veteran has verifiable sufficient income to meet:
- The Mortgage Payment
- Other Shelter Expenses
- Debts and Obligations
- Family Living Expenses
- Stable and reliable
- Anticipated to continue
- Sufficient in amount
Generally, a two-year history of employment is needed but if the underwriter can conclude that the income is stable, reliable and anticipated to continue in the future that income will qualify as effective and 2 years is not required. (IMPORTANT NOTE TO READER: Less than 12 months is not considered stable and reliable; however, it may be considered stable depending on the facts).
Income from part-time jobs, second jobs, over-time and commissions is typically not considered stable unless it has been earned for a minimum 24 months. There are rare situations that they can be allowed with less than 24 months but must not be less than 12 months.
Self Employed Income:
Income from a self-employed veteran is considered stable when the veteran has been in business for at least two-years. Signed personal tax returns, as well as business (if applicable) corporation or partnership returns will be required and possibly longer periods if the underwriter warrants. Self employed veterans do provide a greater challenge in that the underwriter will need to analyze the business and its future earnings to determine if sufficient income will be generated for future needs. (IMPORTANT NOTE TO READER: A VA underwriter is not truly the proper person to provide a good analysis of a business’s future earning potential and this can cause a lot of problems in procuring an approval).
Active Military Applicant’s:
A standard Leave and Earnings Statement (LES) is required. The Department of Defense provides service members access to LES through myPay. Complete income calculation guidelines can be found at VA Pamphlet 26-7 Revised, Chapter 4: Credit Underwriting 2. Income k. Active Military Applicant’s Income.
Applicant’s must have sufficient cast to cover closing costs, down payment and the difference if the sales price exceeds the value established by the VA appraiser. While VA does not require “reserves” the underwriter should consider this in the overall credit analysis.
CREDIT, DEBT AND OBLIGATIONS:
Debts showing up on a borrower’s credit report must be taken into consideration and also the debts of a non-borrowing spouse in a community property state must also be taken into consideration when analyzing debt-to-income ratios. All non-reporting debts and obligations must also be taken into consideration and verified. For installment payments it is important to analyze obligations with a remaining term of 10 months or less. If the VA underwriter determines that this type of debt is not significant, he/she should not give them any weight – exclude them from debt-to-income analysis. If they are determined to cause a severe impact on the veteran’s resources than they must be included in the debt-to-income analysis. (IMPORTANT NOTE TO READER – debts assigned to an ex-spouse by divorce should not be charged against the veteran-borrower).
When is comes to student loans and repayment in the calculation of debt-to-income ratios VA loans are the most lenient! If the payment is reflected on the credit report or if the veteran can provide a statement than that is the number that is to be used. If a veteran or other borrower provide written evidence that the loans are in deferment at least 12 months beyond the loan closing, a monthly payment does not need to be considered (Circular 26-17-02). If the student loan repayment will begin within 12 months of the close date than a 5% calculation must be accessed. Calculate the student loan X 5% and divide that number by 12 months (Example: $30,000 X 5% = $1,500/12=$125). (IMPORTANT NOTE TO READER – loans secured against deposited funds such as retirement accounts and life insurance policies that have cash value are not required to be counted as a liability and against your debt to income ratio’s.)
All lenders should perform a CAIVRS inquiry before proceeding to a loan application on the veteran. CAIVRS stands for Credit Alert Interactive Voice Response System. This system is also used for any other federally insured loans such as FHA and USDA. CAIVRS is used to determine if a potential borrower has a Federal debt that is currently in default or foreclosure or has a claim been paid in the last three years. In some cases, borrowers who have defaulted on federal loans in the past three years may not be eligible for another government backed loan. (IMPORTANT NOTE TO READER: A veteran or applicant will not be considered for a federally backed government loan if he/she is delinquent or in default to the federal government).
It is important that your lender have a very good handle on all things VA before applying. We have over 50 years combined VA experience and treat our veterans as family as they deserve to – they have earned it!