VA Compensating Factors Guidelines

In this blog, we will cover and discuss the VA compensating factors guidelines on manual underwriting borrowers. When a borrower cannot get an approve/eligible per automated underwriting system (AUS), they cannot qualify for a mortgage loan unless it gets to be a manual underwrite. Manual underwriting is only allowed on VA and/or FHA loans. In order to be eligible for a VA and/or FHA manual underwrite, they need to get a refer/eligible per automated underwriting system findings. Refer with caution by the automated findings are not eligible for manual underwriting. Compensating Factors play an important role in manual underwriting. This holds especially true if the borrower has high debt-to-income ratios. 

The Importance Of VA Compensating Factors On Manual Underwriting In Determining Debt To Income Ratio Caps

VA Compensating Factors are required on manual underwriting files with higher debt-to-income ratios. VA Loans is the best loan program in the United States. Lenders offer 100% financing with no down payment required by borrowers at lower rates than conventional loans due to the government guarantee. There is no mortgage insurance required on VA loans. The Department of Veterans Affairs offers VA Loans for veterans of our active and/or retired members of our Armed Services.

What Is The Certificate of Eligibility For VA Loans

To qualify, veterans must have earned a Certificate Of Eligibility also commonly referred to as COE. The Department of Veterans Affairs does not mandate a minimum credit score requirement or a maximum debt-to-income ratio cap on VA Loans that are approve/eligible per automated underwriting system. VA and FHA Loans are the only two loan programs that allow manual underwriting. If borrowers cannot get an approve/eligible and get a refer/eligible per AUS needs to be downgraded to a manual underwrite.

Manual Underwriting on VA and FHA Loans

There are cases where VA and/or FHA Loans need to be downgraded to manual underwriting. Cases when the automated underwriting system cannot render an approve/eligible per AUS. Cases when the AUS renders a refer/eligible per AUS. The Automated Underwriting System will analyze the borrower’s credit, credit scores, payment history, income, assets, liabilities, and other positive and/or negative factors and render its decision. Borrowers who are in a current Chapter 13 Bankruptcy plan that has not been discharged. Chapter 13 Bankruptcy discharge that has not been seasoned for at least two years needs to be manually underwritten.

Mortgage Underwriters Discretion on Manual Underwriting

Mortgage Underwriter’s discretion is heavily reliant on manual underwriting. Underwriters need to be convinced that borrowers have the ability to repay the loan without stress. Compensating factors are heavily weighed on manual underwrites. Compensating Factors such as reserves, longevity on the job, and additional income not used as qualified income are factors predicting a borrower’s ability to repay the mortgage on time. VA Compensating Factors Guidelines are the same and/or similar to FHA’s.

VA Manual Versus Automated Underwriting

VA does not have a minimum credit score nor debt-to-income ratio requirements on automated approvals. The automated findings decide on loan approval. However, with manual underwriting, the manual VA loan decision is dependent on the human mortgage underwriter. VA compensating factors play strong when borrowers have higher debt-to-income ratios.

Mortgage Underwriter Discretion on High DTI VA Borrowers

Underwriters need to make sure borrowers meet all VA Guidelines and have underwriter discretion dependent on compensating factors. Although VA Loans does not have a maximum debt to income ratio requirement, the maximum DTI on manual underwrites is restricted depending on the number of compensating factors. With two compensating factors, underwriters can stretch the DTI to 54%.

VA Compensating Factors That Can Be Taken Into Consideration

Mortgage underwriting has a lot of underwriters’ discretion on manual underwrites. Mortgage underwriters can even allow debt-to-income ratios greater than 50% DTI if the borrower has multiple compensating factors. There is a list of compensating factors mortgage underwriters can take into consideration. Here is a list of VA Compensating Factors Underwriters Can Take Into Consideration:

• Rental Verification with low payment shock.
• A payment shock of $100 or less than a 5% increase is considered a great compensating factor.
• A larger down payment on the home purchase than the minimum required.
• History and ability to save money in the past.
• History of being conservative in using credit.
• Cash reserves and liquid assets such as 401k and/or other types of investment and/or retirement accounts.
• Consistent increase in pay and promotions.
• For example, a police officer gets promoted to sergeant, lieutenant, or captain and is going to night school to advance his/her career.
• Additional income such as part-time job, overtime income, and bonus income that is not used as qualified income.
• Low debt to income ratio.
• Substantial Residual Income.
• Non-borrowing spouse with a full-time job and strong income.

There are other positive factors that can be used as compensating factors.

FHA Manual Underwriting Versus VA Guidelines

FHA Manual Underwriting Guidelines are very similar to VA’s. For FHA loans that are manually underwritten, the maximum debt-to-income ratio is 43% without compensating factors. One-month reserves on one and two-unit properties. 3 months reserves on two to four-unit homes. Borrowers with under 580 credit scores require a 10% down payment and DTI cannot exceed 31 percent front end and 43% back end. Energy efficient homes can have 33 percent front end and 45 percent back end DTI.

HUD DTI Guidelines on FHA Loans

Under 580 FICO requires 3 months reserves on one unit and six months reserves on 2 to 4 unit multi-family homes. Up to 40% front end and 50% back end DTI are allowed with two compensating factors. Mortgage underwriters have underwriter’s discretion to surpass 50% debt-to-income ratios on VA loans for borrowers with multiple compensating factors. Underwriters are given a lot of power and discretion in manual underwriting. 

How VA Compensating Factors Allow Higher DTI On Manual Underwriting

There are no maximum debt-to-income ratio caps on VA loans as long as the borrower gets approve/eligible per the automated underwriting system (AUS). However, it is different on manual underwrites. On manual underwrites, there is a recommended guideline on debt-to-income ratio caps.

DTI Caps on Manual Underwriting on VA Loans

Normally, the debt-to-income ratios should not go over 40% front end and 50% back end on manual underwrites. However, depending on the number of compensating factors, mortgage underwriters can approve VA manual underwrites with debt-to-income ratios higher than 50% DTI. Mortgage underwriters at Gustan Cho Associates have approved 54% debt-to-income ratios on VA manual underwriting with multiple strong compensating factors.

VA Compensating Factors For High Debt-To-Income Ratio on Manual Underwriting

Higher debt to income ratio borrowers can have higher DTI with compensating factors on FHA Loans:

• Borrowers Non-traditional credit with under 580 FICO, the maximum debt-to-income is 31/43 or 33/45 for energy-efficient homes.
• With no compensating factors and 580 FICO plus maximum DTI allowed is 31/43.
• With one compensating factor and 580 FICO, the maximum DTI allowed is 37/47.
• With two compensating factors and 580 FICO, the debt-to-income is 40/50.
• No discretionary debt and 580 credit score the debt-to-income cap is 40/40.

Borrowers who need to qualify for VA and/or FHA Manual Underwriting with a mortgage broker licensed in 48 states with no overlays on VA and FHA Loans, please contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. The team at Gustan Cho Associates is available 7 days a week, on evenings, weekends, and holidays.

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