The homeownership journey is an exciting adventure, especially when you have the support of a VA loan. However, getting to grips with the complex terminology and ever-evolving regulations within the mortgage loan process can often seem daunting. Among these, “VA manual underwriting guidelines” frequently pop up.
But what exactly does it mean? How does it differ from automated underwriting, and how does it influence your VA loan application? Navigating through this maze of formalities might feel intimidating, but worry not. Based on my hands-on experience and practical know-how, unraveling these VA guidelines can help you unlock the potential of preferred homeownership routes, even with a challenging credit history.
Understanding VA Manual Underwriting Guidelines
The VA loan, a privilege earned by our veterans, service members, and select military spouses, might seem complex at first glance, especially when “underwriting” comes into play. However, it’s merely an industry jargon for evaluating the risk in lending to a potential borrower.
Underwriting VA guidelines are essentially a road map for lenders, outlining what they should look for in a potential borrower’s application to determine their creditworthiness. These guidelines are designed to give the underwriter guidance and the guidelines to form a structured way to assess if a borrower should be approved for a loan.
However, many lenders do not manually underwrite VA loans mainly for two reasons:
- It’s a labor-intensive process that requires a complete and meticulous breakdown of your financial history.
- It needs the expertise to identify and evaluate any potential risks associated with approving the loan.
Overall, it’s essential to have a loan officer with ample experience in underwriting loans to look past the numbers and gauge the risk from a much broader, more comprehensive perspective.
Automated VS Manual Underwriting
Automated approval is like processing your loan file application through a software program, often called the Automated Underwriting System or AUS.
Here’s a table showing the difference between automated and manual underwriting on VA:
| Automated | Manual | |
|---|---|---|
| Speed | Fast | Slower |
| Complexity | Less (uses algorithms to analyze applications) | More (requires a detailed analysis of the borrower’s history) |
| Flexibility | Less (rigid algorithms) | More (human judgment allows for exceptions) |
| Efficiency | High (can handle a large number of applications) | Lower (requires individual attention for each case) |
In essence, underwriting a loan manually requires the expertise and judgment of a human. Manual review may come into play after the AUS flags perturbing elements from the borrower’s financial past during the VA loan process.
The Role of Lenders in the VA Loan Underwriting Process
Lenders are licensed financial institutions that process and originate loans, working directly with borrowers throughout the loan application process.
Their role includes collecting documents, verifying information, and evaluating the borrower’s loan repayment ability. They also determine if the borrower meets the VA loan eligibility criteria and submit the application to the VA for the loan guarantee, which serves as an added level of risk protection.
When underwriting manually, the lender can review and consider circumstances that the AUS might overlook at the time of underwriting, making it beneficial to borrowers who may struggle with VA loan approval with late payments.
Lender Overlays
Overlays are additional criteria individual lenders impose that extend beyond the minimum VA agency guidelines. Their existence offers lenders an extra layer of risk management.
While the VA doesn’t mandate a specific credit score for its loans, many lenders operate with a self-imposed minimum credit score. This means you could face challenges attaining a loan if you don’t meet their specific credit score threshold, despite clearing the VA’s requirements.
Lenders might further limit potential borrowers’ acceptable debt-to-income ratio (DTI). This means you could be required to have a lower DTI ratio than the maximum acceptable ratio set out by the VA, further narrowing the qualification funnel.
Debt to Income and Manual Underwriting for a Mortgage
Underwriting manually involves a thorough and meticulous evaluation process to determine a potential borrower’s creditworthiness. This assessment is done manually by reviewing the loan application and relevant financial documents instead of using an automated system. Here is what the lender considers during the process:
- DTI: The underwriter compares your gross monthly income to your major monthly debts. The VA typically recommends a maximum DTI of 41%. However, lenders may allow higher ratios with strong compensating factors.
- Credit Score and History: Lenders may impose their own minimum credit score requirements, and it’s generally advised to aim for a credit score of at least 600. Underwriting allows for a manual review of your financial behavior over the years.
Also, a VA underwriting process closely inspects your financial statements, looking for a consistent 12 month record of on-time payments and reliable residual income meeting the VA loan income requirements. This illustrates a borrower’s dependability and likelihood of maintaining timely mortgage payments.
Manual Downgrade – Credit Issues
Regarding loan applications, your credit history is pivotal in determining the lending risk. However, there may be instances where your credit background raises potential issues, causing a manual downgrade for a thorough review. These credit issues could include:
Previous Mortgage Foreclosure
If a borrower has had a previous mortgage foreclosure, it could signal a red flag. Although it’s not an outright disqualification for a home loan, it does warrant a more thorough review to understand the circumstances surrounding the foreclosure incident. The lender would typically explore its reasons and evaluate your current fiscal responsibility.
Mortgage History
The VA continually supports Veterans and service members in becoming homeowners. However, if the borrower’s mortgage history shows inconsistencies, such as late mortgage payments or loan modifications, it may necessitate a manual downgrade. This will require deeper dive into the borrower’s reformation since those incidents and assessing if they are now a safer lending risk.
Bankruptcy
A bankruptcy status in the borrower’s history could cause a manual downgrade. The type of bankruptcy, whether Chapter 7 or Chapter 13, the circumstances surrounding it, and the duration since the discharge will influence the loan decision. VA loan guidelines stipulate minimum waiting periods post-bankruptcy discharge.
Disputed Accounts
Disputed accounts on your credit report can trigger a manual downgrade. Disputes may represent potential liabilities or indicate financial irresponsibility. Therefore, these disputes should be resolved during a manual review before loan approval.
Compensating Factors in Manual Underwriting
Compensating factors are conditions that offset certain risk factors associated with your loan application. They can play a significant role in the process by justifying the approval of loans even when you bend the DTI or derogatory credit score guidelines.
Common compensating factors may include:
- Substantial liquid assets
- Little or no increase in present housing expense
- Significant additional income not reflected in the effective income
Understanding how compensating factors influence the mortgage process offers a more comprehensive picture of your borrowing profile.
Second Chances: Exploring the Role of Manual Underwriting
Manual underwriting can often act as a saving grace for potential borrowers who might need to meet the standard automated approval criteria. It provides a second chance to individuals who have had financial missteps because it zeroes in on the bigger picture—considering elements like compensatory factors, economic improvements, and more personalized factors to equip borrowers for a well-deserved shot at homeownership.
Having dedicated myself to this subject matter, understanding the manual guidelines will help you know where you stand financially and gives you the confidence to navigate the loan program process and achieve your goals.
Frequently Asked Questions About VA Manual Underwriting Guidelines
Does VA have manual underwriting guidelines?
Yes, the VA does have specific manual underwriting guidelines. These guidelines provide a framework to evaluate the creditworthiness of borrowers who may not meet the criteria through automated systems. Also, the process allows humans to scrutinize a borrower’s financial history, credit score, employment stability, and debt-to-income ratio.
What triggers manual underwriting?
Factors such as past financial issues, irregular income sources, or disputed accounts on a credit report can trigger this process. In these instances, an automated process might not provide a comprehensive insight into the ability of the borrower to repay the loan. Manual underwriting allows loaners to review the nuances of these unique situations and make an informed judgment about the applicant’s creditworthiness.
What is the maximum debt ratio for manual underwriting?
The maximum debt ratio commonly recommended is 41%. However, the actual percentage may vary based on specific overlays and the presence of decisive compensating factors. Substantial reserves, solid credit history, and significant residual income allow for a higher debt ratio, depending on the lender’s discretion.
