Manual Underwriting Guidelines on VA Loans

In this blog, we will discuss and cover VA manual underwriting guidelines on VA loans. We at GCA Forums Mortgage Group specialize in manual underwriting guidelines on VA loans. You often will need an approved, eligible AUS findings report. That does not mean your loan is dead; you must downgrade to a VA manual underwriting file. That is scary for many clients, but it shouldn’t be.

VA Manual Underwriting Lenders with No Lender Overlays

GCA Forums Mortgage Group originates, processes, underwrites, and CLOSEs VA Manual Underwriting loans all the time. Many veterans think the paperwork required to complete VA manual underwriting is extensive and that the loans are impossible to close with an inexperienced lender; that can be the case. We will detail one of the main qualifying components of a manual underwrite: debt-to-income ratio caps.

Manual Underwriting Guidelines on VA Loans: Front-End and Back-End Debt-to-Income Ratio

It is important to understand that there are two debt-to-income ratios for mortgage qualifications: front-end DTI and back-end DTI. Debt-to-income ratios are different for every borrower. The debt-to-income ratio is simply a ratio of your debts against how much money you make (gross pay).

Front-end debt to income (housing ratio):

• The front-end debt-to-income ratio is the total of your housing payment / your total gross monthly income

Back-end debt to income:

• Back-end debt to income is the total of your housing payment plus your consumer debts / your total gross monthly income

Consumer debt is all debts that report to your credit report.

• For example, a vehicle payment will be in your DTI ratio, but a cell phone bill will not be

Housing payment means principal, interest, property taxes, insurance, and homeowner association dues. TOTAL HOUSING PAYMENT

DTI example:

• Housing payment: $2,100 Consumer debt: $9,000 Total Income: $5,600

Front End DTI: 37.50%    Back end DTI: 53.57%

Manual Underwriting Guidelines on VA Loans on Debt Income Ratio

VA loans do not have a maximum debt-to-income ratio guideline from HUD. Many lenders have LENDER OVERLAYS that limit the debt to income you can go up to. With Approve Eligible AUS findings, we have seen 63% of back-end DTI approved. What happens when your application is not an approved/eligible AUS? You then downgrade the file to a manual underwrite. The underwriter decides how high they will allow the veteran to go. In my experience, the highest I have seen is a 54% back-end debt-to-income ratio.

Lender Overlays on Manual Underwriting Guidelines on VA Loans

There is no true guideline on the maximum front-end debt-to-income ratio; this is the underwriter’s discretion. If you have been told you do not qualify for a VA loan, please ask your lender if they can complete manual underwriting. Most lenders do not manually underwrite, so they will tell you you don’t qualify. Please reach out to us for a second opinion (or third opinion). After a brief conversation, we can understand if we can help you. There are many ways to strengthen a loan that requires manual underwriting. Ways to strengthen your application are called compensating factors.

Manual Underwriting Guidelines on VA Loans: Importance of Compensating Factors

What are a few examples of compensating factors? In the following paragraphs, we will discuss and cover the importance of compensating factors. Compensating factors are important for borrowers with a high debt-to-income ratio on VA loans.

Reserves Are Compensating Factors on VA Manual Underwriting

Reserves –

• Funds available after closing costs and any down payment you decide to put down
• These funds must be verifiable in a bank or a retirement account
• Having extra funds available after closing is going to give you the best chance for qualification
• To be used as a compensating factor, you must have 3 months for 1–2 unit homes and 6 months for a 3–4 unit property

The Importance of Past Work History

Longevity on the job-

• If you have been working in your current position for 5 years or more, the underwriter can see the stability
• Giving you a higher chance of getting your loan approved

What Is Payment Shock?

Manual Underwriting Guidelines on VA Loans on Payment Shock

• • Payment shock refers to your housing payment and whether it is increasing or not
  • To be used as a compensating factor, your payment must not increase by more than 5%
  • This includes PITIA (principle, interest, taxes, insurance, and any homeowner’s association dues)

Residual Income Manual Underwriting Guidelines on VA Loans

Manual Underwriting Guidelines on VA Loans on Residual Income:

• Maybe the reason HUD does not set a maximum allowed DTI ratio
• Residual income is another topic that can be quite confusing
• Please see our blog on VA RESIDUAL INCOME
• This MUST be passed whether you have an approved/eligible AUS or require a manual underwrite
• Residual income is based on location and family size

The AUS findings will tell you how much residual income you must have for your loan.

Starting Qualifying For Manual Underwriting Guidelines on VA Loans Pre-Approval Process

Would you like me to start my application?

First, gather the following documentation:

• Last 60 Days Bank Statements—to source money for escrows
• Last 30 Days Pay Stubs
• Last Two Years W2’S
• Last Two Years Tax Returns
• Driver’s License
• Certificate of Eligibility
• Name of contact to verify rental payments

Second, contact Gustan Cho at GCA Forums Mortgage Group at 800-900-8569. You can also text us for a faster response or email us at gcho@gustancho.com. After a brief conversation, we will discuss your qualifications and send you an application link. We are experts in manually underwriting VA loans with higher debt-to-income ratios.

Frequently Asked Questions on Manual Underwriting Guidelines on VA Loans

This is a complete list of VA Loan Manual Underwriting Guidelines Frequently Asked Questions FAQs:

What Does it Mean to do Manual Underwriting of a VA Loan?

Manual underwriting in a VA loan means that a person has to determine whether to grant or deny the loan application by reviewing the client’s financial income, credit, assets, and other detailed information that determines eligibility. Furthermore, it does not solely depend on AU systems.

When Can a Borrower Manually Underwrite a VA Loan?

A borrower can manually underwrite a VA Loan when:

The Automated Underwriting Systems do not satisfy requisite conditions. The client’s credit needs to be updated or improved. For instance, the client may have gone bankrupt. There is a vicious credit situation owing to foreclosure. The debtor’s DTI ratio is larger than 41 and does not get enough automated approval.

Manual Underwriting Credit Conditions for VA Loans What are they?

• Minimum Credit Score A Borrower Must Provide: To ensure that the client is fully qualified for the loan, VA does not stipulate a minimum credit score.
• However, a lender does, preferably around 580-620.
• How many months of payment history does a client need?
• To validate eligibility, a client must have at least 12 days during which almost every payment has been made punctually.
• Likewise, late payment and a few other conditions require compensation or explanations.
• Adverse Credit Events: To qualify, borrowers declared insolvent, had their homes foreclosed, or faced legal judgment must fulfill certain waiting periods.

What Guidelines Exist For Debt-to-Income (DTI) Ratio For Manual Underwriting?

• 41% DTI Benchmark: The borrower’s needs are taken into account with a preferred value of 41% or lower.
• 41% DTI: If the borrower’s DTI exceeds 41%, the following compensating factors are sufficient.
• Residual income is more than 20% higher than the cap set by the VA guidelines.
• Employment records that indicate a long, stable period of consistency.
• Having plenty of easy cash in assets.
• Low amounts of borrowing and easier debt.

What is Residual Income, and Why is it Important in Manual Underwriting?

• Residual income refers to the remaining amount to be paid monthly for debts such as the mortgage, utilities, and other parameters.
• VA Requirements: This value varies with family size and location and is one or more set resilient levels for average income. Residual income guidelines can be bypassed during manual underwriting, and higher DTI and weaker credit profiles can be accommodated.

Do Not Finance A VA Loan With Reasons Such As Having No Traditional Credit And Stressing that you Never Had a Credit History

Traditional credit is optional for these borrowers. They can consider other forms of credit, such as Rent payment history, utility or phone bill payments, and insurance premium payments.

How does Manual Underwriting Consider a Foreclosure or Bankruptcy?

• Chapter 7 Bankruptcy: There is a two-year waiting period from the discharge date, and proof of credit re-establishment is required.
• Chapter 13 Bankruptcy: There is a possibility of being qualified, provided the court trustee agrees and has a history of 12 months of on-time payments in Chapter 13.
• Foreclosure: 2 years from the date of Involuntary Repossession or mortgage foreclosure is common.

What Are Some of the Factors that Compensate Underwriting in Manual Underwriting?

Compensating factors assist in mitigating the risk in the manual underwriting process. One of them includes:

• A high residual income that surpasses the VA stipulations.
• A modest amount of total debts.
• Large cash reserves or savings.
• Long-term employment coupled with an unbroken income history.
• A significant down payment (to qualify for VA loans, it is optional to make one).

Are Collections or Judgments Possible Under Manual Underwriting?

• Loan approval may be postponed while these collections and judgments are settled:
• Collections: Depending upon the lenders, these must often be cleared.
• Judgments: Of course, perfect repayment and collection must be made, showing further proof of time-honored payments.

Is a Borrower Who Has Late Mortgage Payments Being Qualified Possible? What Are the Cases?

Yes, but it relies on the specifics:

• An Isolated Incident: Borrowers can use this as leverage if they have one late payment, as long as they have a credible reason.
• Pattern of Late Payments: Multiple late payments normally need strong compensating factors for the risk incurred.

What Documentation is Required For Manual Underwriting?

The borrower has to provide substantial documentation, some of which includes the following:

• Complete Two years of tax registrations or W-2 forms.
• The latest pay stubs and other proof of income are attached.
• Bank statements that show evidence of reserves.
• Letters providing explanations on adverse credit events or late payments.

How Long Does it Take for the Manual Underwriting Process to be Completed?

Manual underwriting can take longer than all automated processes. This is because it involves a detailed check and review of all the documents. On average, it takes 2-4 weeks, but this can differ based on the lender’s or borrower’s financial situation.

Can Manual Underwriting Approve a Loan That AUS denied?

Yes. With manual underwriting, the AUS denied a loan can consider all compensating factors and provide a global view of the borrower’s profile, allowing the loan to be approved.

Is it True that the VA Manual Underwriting Requirements Differ with Each Lender?

No. While the VA sets aside some guidelines, other lenders may impose their own overlays or requirements more specific to SBA Manual Underwriting. It’s best to compare and shop the lenders.

What Happens When Manual Underwriting Denies a Loan?

In the event a manual type VA loan application is declined:

• If you are questioned, consider alternatives to end those denials. Examples are paying off collection accounts and building some residual income.
• Widen your options by checking other less strict lenders on their terms.
• Look for every type of VA loan available or any other method of getting finances, like non-QM loans.
• If you rely on a particular manual type VA loan option that otherwise gets declined by most automated systems, then you can get it through a different manual reviewing option. To improve your odds further, do the following:
• It’s advisable to have a great history of making repayments on time.
• Minimize your outstanding debt and accumulate reserves.
• Find a knowledgeable lender with experience with the different types of VA manual underwriting requirements.

If you have prepared the required documents and are well-versed in the procedure, you can effectively deal with the manual underwriting process for a VA loan.