VA Underwriting Guidelines 

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VA Debt to Income Guidelines

Debt-to-Income Ratio

VA's debt-to-income ratio is a guide and, as an underwriting factor, it is secondary to the residual income. It should not automatically trigger approval or rejection of a loan. Instead consider the ratio in conjunction with all other credit factors.  This page goes into great detail of those factors.

VA only uses a Back Ratio of 41% for qualifying.  To calculate this ratio add up the following monthly expenses and then divide that total by the gross monthly income.

  • New monthly housing payment (PITI)
  • Monthly installment payments that extend beyond 9 months.
  • Minimum Monthly payments on revolving charge cards
  • Monthly child support or alimony
  • Nursery care/child care

A ratio greater than 41% requires close scrutiny unless the ratio is greater than 41% solely due to the existence of tax-free income , or residual income exceeds the guideline by at least 20%. 

Compensating Factors

Compensating factors may affect the loan decision. These factors are especially important when reviewing loans which are marginal with respect to residual income or debt-to-income ratio. They cannot be used to compensate for unsatisfactory credit.

Valid compensating factors should represent unusual strengths rather than mere satisfaction of basic program requirements. For example: Significant liquid assets may compensate for a residual income shortfall whereas long-term employment would not. 

Compensating factors include, but are not limited to the following: 

  • Excellent credit history. 
  • Conservative use of consumer credit. 
  • Minimal consumer debt. 
  • Long-term employment. 
  • Significant liquid assets. 
  • Sizable down payment. 
  • The existence of equity in refinancing loans. 
  • Little or no increase in shelter expense. (payment shock) 
  • Military benefits. 
  • Satisfactory home ownership experience. 
  • High residual income. 
  • Low debt-to-income ratio. 
  • Tax credits for child care, and 
  • Tax benefits of home ownership. 

Payment Shock

Closely scrutinize a case in which the applicant will be paying significantly higher shelter expenses than he or she currently pays. Consider the ability of the applicant and spouse to accumulate liquid assets; such as: Cash and Bonds, and the amount of debts incurred while paying a lesser amount for shelter. 

If an application shows little or no capital reserves and excessive obligations, it may not be reasonable to conclude that a substantial increase in shelter expenses can be absorbed. 

Divorce

The payment amount on any alimony and/or child support obligation of the applicant must be verified.  Do not request documentation of an applicants divorce unless it is necessary to verify the amount of any alimony or child support liability indicated by the applicant. 

If, however, in the routine course of processing the loan, the lender encounters direct evidence (such as, in the credit report) that a child support or alimony obligation exists, make any inquiries necessary to resolve discrepancies and obtain the appropriate verification. 

Alternative Credit

For obligations that have not been rated on the credit report or elsewhere, obtain the verification and rating directly from the creditor. 

For applicants with no established credit history, base the determination on the applicants payment record on utilities, rent, automobile insurance, or other expenses that applicant has paid. 

Absence of a credit history is not generally considered an adverse factor. 

Deducting Debts from Income

Deduct significant debts and obligations from total effective income when determining ability to meet the mortgage payments. Significant debts and obligations include:

  • Debts and obligations with a remaining term of 10 months or more; that is, long-term obligations, and 
  • Accounts with a term less than 10 months that require payments so large as to cause a severe impact on the family's resources for any period of time.  Example: Monthly payments of $300 on an auto loan with a remaining balance of $1,500, even though it should be paid out in five months, would be considered significant. The payment amount is so large as to cause a severe impact on the family's resources during the first, most critical, months of the home loan.

Determine whether debts and obligations, which do not fit the description of "significant", should be given any weight in the analysis. They may or may not have an impact on the applicants ability to provide for family living expense. 

Contingent liabilities

Applicant as Co-obligor on Another's Loan The applicant may have a contingent liability based on co-signing a loan. If there is evidence that the loan payments are being made by someone else, and there is no reason to believe that the applicant will have to participate in repayment of the loan, then the lender may exclude the loan payments from the monthly obligations factored into the net effective income calculation in the loan analysis. 

Pending Sale of Real Estate

In some cases, the determination that the income and/or assets of a veteran are sufficient to qualify for the loan depends upon the consummation of the sale of presently owned real property. Sales proceeds may be necessary to:

  • Clear the outstanding mortgage (s) against the property. 
  • Pay off outstanding consumer obligations, and/or 
  • Make a down payment or pay closing costs on the VA loan. 

Alternatively, the veteran may intend to sell the property with the buyer assuming the outstanding mortgage obligation. The lender may disregard the payments on the outstanding mortgage and any consumer obligations, which the veteran intends to clear if available information provides a reasonable basis for concluding the equity to be realized from the sale will be sufficient for this purpose. 

Debts Owed to the Federal Government

An applicant cannot be considered a satisfactory credit risk if he or she is presently delinquent or in default on any debt to the Federal Government until the delinquent account has been brought current or satisfactory arrangements have been made between the applicant and the Federal agency. The refinancing of a delinquent VA loan with an IRRRL satisfies this requirement. An applicant cannot be considered a satisfactory credit risk if he or she has a judgment lien against his or her property for a debt owed to the Government until the judgment is paid or otherwise satisfied.

Debt Related to VA Benefits

Before processing a loan involving certain veterans,  the lender must submit VA Form 26-8937, Verification of VA Benefit-Related Indebtedness, to the VA office where the loan application and/or closed loan package will be sent.  VA will complete and return the form to the lender. 

The loan cannot be submitted for prior approval or approved under the automatic procedure until the lender obtains the completed form from VA. The lender must submit the completed form with the loan package. 

If the form indicates that the applicant receives non-service-connected pension or has been rated incompetent by VA, the loan cannot be closed automatically. 
Submit the loan for prior approval. 

If the form indicates that the applicant has any of the following: 

  • An outstanding indebtedness of overpaid education, compensation or pension benefits. 
  • An education or direct home loan in default. 
  • An outstanding indebtedness resulting from payment of a claim on a prior guaranteed home loan. 
  • A repayment plan for any of these debts that is not current, 

then: one of the following must accompany the loan package: evidence of payment in full of the debt, or evidence of a current repayment plan acceptable to VA and evidence that the veteran executed a promissory note for the entire debt balance. 

VA may find a repayment plan acceptable if the veteran has been satisfactorily making payments on a repayment plan in effect prior to the lenders inquiry. 

The veterans overall credit history and anticipated financial capacity after the proposed loan is made indicate a reasonable likelihood that the repayment plan will be honored and the outstanding amount of indebtedness is not so large that it would prevent payment in full within a reasonable period (approximately one year), or 

The case involves unusually meritorious circumstances.  Example: Consideration would be given to a veteran with an outstanding credit history and adequate income whose debt balance is too large to be reasonably paid out in less than 18 months to two years.

VA will offer special consideration to a veterans claim that he or she was not previously aware of an overpayment of benefits

Note: No promissory note is required in cases referred to the Department of Justice, General Accounting Office, or VA Regional Counsel for judicial enforcement. In such cases, VA will obtain information on the applicants debt status from these parties and relay pertinent information to the lender.

 

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