What to Expect from VA Loan Underwriting
The goal of the VA Loan is to provide veterans and service members interested in homeownership the opportunity to achieve the American dream without spending months to years saving for a down payment and establishing credit. However the program isn’t only meant to get veterans into homes, but to keep them in their homes.
To do this, the VA uses underwriting standards that assess whether or not a potential borrower can manage a substantial mortgage. These standards assure the lender and the VA that the potential homebuyer can afford the home they are about to purchase. More specifically, the VA may only guarantee a loan when the veteran can prove:
- They are a satisfactory credit risk, and
- They have present and anticipated income that bears a proper relation to the negotiated terms of repayment
In order to determine whether a borrower meets these two factors, the lender will first utilize an Automated Underwriting System (AUS).
The Automated Underwriting System
When a veteran comes to a lender their information will be processed by an AUS. This computer program is used for conventional loans, FHA loans and VA loans, and it allows for the lender to quickly assess whether the borrower’s current income and credit score will meet the standards put forth by the VA.
This streamlines the underwriting process, and tends to reduce the documentation requirements on applicants processed by an AUS. According to the VA, the level of reduced of documentation depends on the risk classification assigned. Borrowers who are approved or accepted by the AUS receive the following documentation reductions:
- No verification of rent
- No verification of ratios or credit worthiness
- No explanation for employment gaps if gaps are greater than 60 days
- No verification of employment if the borrower has been with the same employer for 1 year and W-2 Forms for 1 previous year have been collected
Veterans who are self-employed also receive documentation reductions in relation to their business. This reduction of documentation means veterans who have nurtured a healthy credit score and have a sound fiscal history will have an easier time maneuvering the VA loan.
But the AUS doesn't accept all prospective borrowers. The AUS will usually reject a candidate for the following reasons:
- A lack of credit depth or history
- A bankruptcy in the last 24 months
- Default or delinquency on federal debt
- Late mortgage payments
- Foreclosure, short sale or deed-in-lieu of foreclosure.
However, veterans who don’t meet the underwriting standards of the AUS still have a chance of getting a VA home loan. These vets will need to have a manual underwriting performed on their application.
Manual VA Loan Underwriting
Lenders are responsible for evaluating each VA loan applicant, so it is very important that each borrower be financially prepared to purchase a home. Manual underwriting entails having a human underwriter look over a VA loan applicant’s financial history more thoroughly.
The manual underwriter won’t immediately reject an applicant for foreclosures, late payments, defaults, bankruptcy, lack of credit depth etc. Instead, the underwriter will crunch the numbers and see if a VA loan is an option for the prospective borrower. Unfortunately, manual underwriting comes with tighter requirements on things like debt-to-income (DTI) ratio, residual income, derogatory credit, financial documentation and more.
Borrowers who have faced financial difficulties in the past need to be prepared for a manual underwrite. It’s important to note that unlike other factors a poor credit history alone is cause for disapproving a VA loan. This means the borrower needs to improve their credit score and prove their ability to take on future debt.