Loan Info

Chapter 4.  Credit Underwriting

Overview

In this Chapter
This chapter contains the following topics.

 

Topic Topic Name See Page

1

How to Underwrite a VA-Guaranteed Loan  4-2

2

Income  4-6

3

Income Taxes and Other Deductions from Income

4-25

4

Assets

4-27

5

Debts and Obligations

4-29

6

Required Search for and Treatment of Debts Owed to the Federal Government

4-34

7

Credit History

4-40

8

Documentation for Automated Underwriting Cases

4-46

9

How to Complete VA Form 26-6393, Loan Analysis

4-54

10

How to Analyze the Information on VA Form 26-6393

4-59

11

Examples of Underwriting Deficiencies

4-63


1.  How to Underwrite a VA-Guaranteed Loan

Change Date
April 10, 2009, Change 10

  • This section has been updated to correct hyperlinks and to make minor grammatical edits.
a. VA Underwriting Standards
VA loans involve a veteran’s benefit.  Therefore, lenders are encouraged to make VA loans to all qualified veterans who apply. 

VA’s underwriting standards are intended to provide guidelines for lenders’ underwriters as well as VA’s underwriters.  Underwriting decisions must be based on sound application of the underwriting standards, and underwriters are expected to use good judgment and flexibility in applying the guidelines set forth in the following pages.

b. Basic Requirements
By law, VA may only guarantee a loan when it is possible to determine that the veteran:

  • is a satisfactory credit risk, and
  • has present and anticipated income that bears a proper relation to the contemplated terms of repayment.

 

VA’s underwriting standards are incorporated into VA regulations at 38 CFR 36.4337 and explained in this chapter.  This chapter addresses the verifications, procedures, and analysis involved in underwriting a VA-guaranteed loan.  It provides guidance on how to treat income, debts and obligations, credit history, and so on, and how to present and analyze these items on VA’s loan analysis form.  It does not deal with every possible circumstance that will arise; therefore, underwriters must apply reasonable judgment and flexibility in administering this important veteran’s benefit.

 

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1.  How to Underwrite a VA-Guaranteed Loan, Continued

c. Lender Responsibility
Lenders are responsible for:

  • developing all credit information,
  • properly obtaining all required verifications and the credit report,
  • ensuring the accuracy of all information on which the loan decision is based,
  • complying with the law and regulations governing VA’s underwriting standards, and with VA’s underwriting policies, procedures, and guidelines, and
  • certifying as to compliance with all of the above.
d. Lender Procedures
Section 2 of chapter 5 provides an overview of all procedures which must be completed when making a VA loan.  The procedures below address only the credit underwriting of the loan.

 

Step Action

1

Initiate the VA and Credit Alert Interactive Voice Response System (CAIVRS) inquiries described in section 6 of this chapter.

2

Obtain all necessary verifications. 

The applicant’s authorization can be obtained for each verification needed, or on one blanket authorization form (attach a copy of the blanket authorization to each verification requested, including VA Form 26-8937, Verification of VA Benefits, if applicable).

The credit report and verifications can be ordered by the lender or its agent or a party designated by the lender to perform that function.  However, these documents must always be delivered by the credit reporting agency or verifying party directly to the lender or its agent, and never to another party.  That is, while a lender may delegate authority for a builder, realtor, or other person to order the report for the lender, the report may not be delivered to such builder, realtor, and so on, and may not pass through the hands of any such party or the applicant.

3

Compare similar information received from different sources and resolve any discrepancies.  For example, the number of dependents provided on the Uniform Residential Loan Application, tax returns, credit report, and so on, should be the same.  In addition, the status of debts provided on the URLA and credit report should be the same.

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1.  How to Underwrite a VA-Guaranteed Loan, Continued

d. Lender Procedures (continued)

 

Step Action

4

Complete VA Form 26-6393, Loan Analysis, in conjunction with a careful review of the loan application and supporting documentation.

The form is not required for Interest Rate Reduction Refinancing Loans (except IRRRLs to refinance delinquent VA loans).

5

Indicate the loan decision in item 50 of the Loan Analysis after ensuring that the treatment of income, debts, and credit is in compliance with VA underwriting standards.

6

Loans closed by an automatic lender

The underwriter must certify review and approval of the loan by signing item 51 of the Loan Analysis (for Automated Underwriting cases, see section 8 of this chapter).

 

Note: For nonsupervised automatic lenders, line 51 signature must be a VA-approved underwriter.

Prior approval loans

The individual with authority to determine that the loan meets VA credit standards and should be submitted to VA, must sign item 51 of the Loan Analysis. 

7

An officer of the lender authorized to execute documents and act on behalf of the lender must complete the following certification:  “The undersigned lender certifies that the loan application, all verifications of employment, deposit, and other income and credit verification documents have been processed in compliance with 38 CFR Part 36; that all credit reports obtained in connection with the processing of this borrower’s loan application have been provided to VA; that, to the best of the undersigned lender’s knowledge and belief, the loan meets the underwriting standards recited in chapter 37 of Title 38 United States Code and 38 CFR Part 36; and that all information provided in support of this loan is true, complete and accurate to the best of the undersigned lender’s knowledge and belief.”

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1.  How to Underwrite a VA-Guaranteed Loan, Continued

e. Underwriting Special Types of Loans
The underwriting standards and procedures explained in this chapter apply to these special types of loans generally.  However, some special underwriting considerations also apply and can be found as follows:

 

Type of Loan Chapter Section
Joint Loans

7

1

Energy Efficient Mortgages (EEMs)

7

3

Graduated Payment Mortgages (GPMs)

7

7

Growing Equity Mortgages (GEMs)

7

8

Loans Involving Temporary Interest Rate Buydowns

7

9

Farm Residence Loans

7

10

f. Refinancing Loans
While the underwriting standards detailed in this chapter apply to “cash-out” refinances, IRRRLs generally do not require any underwriting. 

IRRRLs made to refinance VA loans 30 days or more past due must be submitted to VA for prior approval.  It must be reasonable to conclude that:

  • the circumstances that caused the delinquency have been corrected, and
  • the veteran can successfully maintain the new loan.

 

Reference:  See chapter 6 for details on all types of refinancing loans.


2.  Income

Change Date
April 10, 2009, Change 10

  • This section has been updated to correct hyperlinks and to make minor grammatical edits.
  • Subsection m has been updated by removing the requirement that lenders must obtain a statement regarding a person’s membership in the Reserves or National Guard.
a. Underwriter’s Objectives
Identify and verify income available to meet:

  • the mortgage payment,
  • other shelter expenses,
  • debts and obligations, and
  • family living expenses.

 

Evaluate whether verified income is:

  • stable and reliable,
  • anticipated to continue during the foreseeable future, and
  • sufficient in amount.
b. Importance of Verification
Only verified income can be considered in total effective income.  
c. Income of a Spouse
Verify and treat the income of a spouse who will be contractually obligated on the loan the same as the veteran’s income.

To ensure compliance with the Equal Credit Opportunity Act (ECOA), do not ask questions about the income of an applicant’s spouse unless the:

  • spouse will be contractually liable,
  • applicant is relying on the spouse’s income to qualify,
  • applicant is relying on alimony, child support, or separate maintenance payments from the spouse or former spouse, or
  • applicant resides in a community property State or the security is in such a State.

 

Note:  In community property States, information concerning a spouse may be requested and considered in the same manner as for the applicant, even if the spouse will not be contractually obligated on the loan.

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2.  Income, Continued

d. ECOA Considerations
Restrict inquiries related to the applicant’s spouse to the situations listed in the “Income of a Spouse” heading in this section.

Always inform the applicant (and spouse, if applicable) that they do not have to divulge information on the receipt of child support, alimony, or separate maintenance.  However, in order for this income to be considered in the loan analysis, it must be divulged and verified.

Income cannot be discounted because of sex, marital status, age, race, or other prohibited bases under ECOA.

Treat income from all sources equally; that is, the fact that all or part of an applicant’s income is derived from any public assistance program is not treated as a negative factor, provided the income is stable and reliable.

e. Income from Non-Military Employment
Verification:  General Requirement

Verify a minimum of 2 years employment.

If the applicant has been employed by the present employer less than 2 years:

  • verify prior employment plus present employment covering a total of 2 years,
  • provide an explanation of why 2 years employment could not be verified,
  • compare any different types of employment verifications obtained (such as, Verification of Employment (VOE), pay stubs, and tax returns for consistency), and
  • clarify any substantial differences in the data that would have a bearing on the qualification of the applicant.

 

Verification:  Employment Verification Services

Lenders may use VOEs supplied by an employment verification service only if VA has approved the use of VOEs from that particular provider.  VA has approved “FULL” verifications of employment through “The Work Number for Everyone,” a service of the TALX Corporation.  (No pay stub is needed with the TALX verification.)

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2.  Income, Continued

e. Income from Non-Military Employment (continued)
Verification:  Standard Documentation

Acceptable verification consists of:

  • VA Form 26-8497, Request for Verification of Employment, or any format which furnishes the same information as VA Form 26-8497, plus
  • a pay stub if the employer normally provides one to the applicant.

 

If the employer does not indicate the probability of continued employment on the VOE, the lender is not required to request anything additional on that subject.

The VOE and pay stub must be no more than 120 days old (180 days for new construction).

  • For loans closed automatically, the date of the VOE and pay stub must be within 120 days of the date the note is signed (180 days for new construction).
  • For prior approval loans, the date of the VOE and pay stub must be within 120 days of the date the application is received by VA (180 days for new construction).

 

The VOE must be an original.  The pay stub may be an original or a copy certified by the lender to be a true copy of the original.

 

Note:  It is acceptable for Department of Defense civilian employees to provide computer generated pay stubs accessed through myPay (formerly known as E/MSS – Employee Member Self Service).

Verification:  Additional Documentation for Persons Employed in the Building Trades or Other Seasonal or Climate-Dependent Work

In addition to the standard documentation (VOE and pay stub), obtain:

  • documentation evidencing the applicant’s total earnings year to date,
  • signed and dated individual income tax returns for the previous 2 years, and
  • if applicant works out of a union, evidence of the union’s history with the applicant.

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2.  Income, Continued

e. Income from Non-Military Employment (continued) Verification:  Alternative Documentation

Alternative documentation may be submitted in place of a VOE if the lender concludes that the applicant’s income is stable, reliable, and anticipated to continue during the foreseeable future; that is, if the applicant’s income qualifies as effective income. 2 years employment is not required to reach this conclusion.

Alternative documentation consists of:

  • Pay stubs covering at least the most recent 30-day period.

 

Note:  It is acceptable for Department of Defense civilian employees

to provide computer generated pay stubs accessed through myPay (formerly

known as E/MSS – Employee Member Self Service).

  • W-2 forms for the previous 2 years.
  • Telephone verification of the applicant’s current employment.

 

Note:  Document the date of verification and the name, title, and telephone

number of the person with whom employment was verified.

If the employer is not willing to give telephone verification of applicant’s employment or the pay stubs or W-2 forms are in any way questionable as to authenticity, use standard documentation.  Alternative documentation cannot be used.

Pay stubs and W-2 forms may be originals or copies certified by the lender to be true copies of the originals.

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2.  Income, Continued

e. Income from Non-Military Employment (continued) Verification: Fax and Internet

Fax and Internet documentation may be submitted in place of a VOE if the lender concludes that the applicant’s income is stable, reliable, and anticipated to continue during the foreseeable future; that is, if the applicant’s income qualifies as effective income.

Fax and Internet documentation consists of:

 

  • the same information contained in a standard VOE,
  • clear identification of the employer and source of information, and
  • name and telephone number of a person who can verify faxed information.

 

Lenders are responsible for ensuring the authenticity of the documents.  For Faxed documents, review the “banner” information provided at the top of each page of the fax.  For Internet documents, review the information contained on any headers/footers and the banner portion of the downloaded webpage(s).  These pages must contain the uniform resource locator (URL) and the date and time printed.  The documents should also be reviewed for errors such as incorrect area codes, unreadable names or income, etc.

 

Analysis:  General Guidance

Income analysis is not an exact science.  It requires the lender to underwrite each loan on a case-by-case basis, using:

  • judgment,
  • common sense, and
  • flexibility, when warranted.

 

Analyze the probability of continued employment (that is, whether income is stable and reliable) by examining the:

  • applicant’s past employment record,
  • applicant’s training, education, and qualifications for his/her position,
  • type of employment, and
  • employer’s confirmation of continued employment, if provided.

 

In the applicant’s current position, 2 years of employment is a positive indicator of continued employment.  It is not a required minimum and not always sufficient by itself to reach a conclusion on the probability of continued employment.

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2.  Income, Continued

f. Analysis:  Applicant Employed Less Than 12 Months
Generally, employment less than 12 months is not considered stable and reliable.  However, it may be considered stable and reliable if the individual facts warrant such a conclusion.  Carefully consider the employer’s evaluation of the probability of continued employment, if provided.

Assess whether the applicant’s training and/or education equipped him or her with particular skills that relate directly to the duties of his/her current position.  This generally applies to skilled positions.  Examples include nurse, medical technician, lawyer, paralegal, and computer systems analyst.

If the probability of continued employment is high based on these factors, then the lender may give favorable consideration to including the income in the total effective income.  An explanation of why income of less than 12 months duration was used must accompany the loan submission.

If the probability of continued employment is good, but not as well supported, the lender may still consider the income if the applicant has been employed at least 6 months to partially offset debts of 10 to 24 months duration.

Determine the amount which can be used, based on such factors as:

  • the employer’s evaluation of the probability of continued employment, if provided, and
  • the length of employment (for example, 10 months versus 6 months).

 

Note: Include an explanation with the loan submission.

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2.  Income, Continued


g. Analysis:  Recent History of Frequent Changes of Employment
Short-term employment in a present position combined with frequent changes of employment in the recent past requires special consideration to determine stability of income.  Analyze the reasons for the changes in employment.

Reference:  See section 4 of “Current Issues” for a discussion of frequent job changes by individuals with low-to-moderate incomes.

Give favorable consideration to changes for the purpose of career advancement in the same or related field.

Favorable consideration may not be possible for changes:

  • with no apparent betterment to the applicant, and
  • from one line of work to another.

 

If the lender includes applicant’s income in effective income, an explanation must accompany the loan submission.

h. Income from Overtime Work, Part-time Jobs, Second Jobs, and Bonuses
Generally, such income cannot be considered stable and reliable unless it has continued (and is verified) for 2 years.

To include income from these sources in effective income:

  • the income must be regular and predictable, and
  • there must be a reasonable likelihood that it will continue in the foreseeable future based on
  • its compatibility with the hours of duty and other work conditions of the  applicant’s primary job, and
  • how long the applicant has been employed under such arrangement.

 

The lender may use this income, if it is not eligible for inclusion in effective income, but is verified for at least 12 months, to offset debts of 10 to 24 months duration.  Include an explanation.

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2.  Income, Continued

i. Income from Commissions
Verification

When all or a major portion of the applicant’s income is derived from commissions, obtain the following documentation:

  • VOE or other written verification which provides the following: 
  • the actual amount of commissions paid year-to-date.
  • the basis for payment (that is, salary plus commission, straight commission, or draws against commission).
  • when commissions are paid (that is, monthly, quarterly, semiannually, or annually).
  • Individual income tax returns, signed and dated, plus all applicable schedules for the previous 2 years (or additional periods if needed to demonstrate a satisfactory earnings record).

 

Analysis

Generally, income from commissions is considered stable when the applicant has obtained such income for at least 2 years.

  • Less than 2 years cannot usually be considered stable unless the applicant has had previous related employment and/or extensive specialized training.
  • Less than 2 year can rarely qualify.  In-depth development is required for a conclusion of stable income on less than 1 year cases.

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2.  Income, Continued

j. Self-Employment Income
Verification

Obtain the following documentation:

 

  • current financial statements prepared in a generally recognized format, including:

-    year-to-date profit and loss statement

-    current balance sheet

 

Note:  The financial statements must be sufficient for a loan underwriter to determine the necessary information for loan approval.  The lender may require accountant-prepared financial statements or financial statements audited by a Certified Public Accountant if needed to make such a determination due to the nature of the business or the content of the financial statements.

 

  • individual income tax returns, signed and dated, plus all applicable schedules for the previous 2 years (or additional periods if needed to demonstrate a satisfactory earnings record). 
  • if the most recent year’s tax return has not yet been prepared, provide a profit and loss statement for that year, and
  • if the business is a corporation or partnership

-    copies of the signed federal business income tax returns for the previous 2 years plus all applicable schedules, and

-    a list of all stockholders or partners showing the interest each holds in the business.

 

Note:  Obtain a written credit report on the business as well as the applicant as needed.

Analysis

Generally, income from self-employment is considered stable when the applicant has been in business for at least 2 years.

  • Less than 2 years cannot usually be considered stable unless the applicant has had previous related employment and/or extensive specialized training.
  • Less than 1 year can rarely qualify.
  • In-depth development is required for a conclusion of stable income on less than 1 year cases.

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2.  Income, Continued

j. Self-Employment Income (continued) Analyze the general economic outlook for similar businesses to determine whether the business can be expected to generate sufficient income for the applicant’s future needs.

If the business shows a steady or significant decline in earnings over the period analyzed, the reasons for such decline must be analyzed to determine whether the trend is likely to continue or be reversed.

If the business is unusual and it is difficult to determine the probability of continued operation, obtain an opinion on viability and future earnings, and an explanation of the function and financial operations of the business from a qualified party.

Depreciation claimed as a deduction on the tax returns and financial statements of the business may be included in effective income.

k. Active Military Applicant’s Income
Verification

A military Leave and Earnings Statement (LES) is required instead of a VOE.

  • The LES must furnish the same information as a VOE.
  • The LES must be no more than 120 days old (180 days for new construction).
  • For loans closed automatically, the date of the LES must be within 120 days of the date the note is signed (180 days for new construction).
  • For prior approval loans, the date of the LES must be within 120 days of the date the application is received by VA (180 days for new construction).

 

The LES must be an original or a copy certified by the lender to be a true copy of the original. 

Note:  The Department of Defense provides service members access to a computer generated LES through myPay (formerly known as E/MSS – Employee Member Self Service).  This type of LES is acceptable.

In addition, identify servicemembers who are within 12 months of release from active duty or end of contract term.  Find the date of expiration of the applicant’s current contract for active service on the LES (for an enlisted servicemember).  For a National Guard or Reserve member, find the expiration date of the applicant’s current contract. 

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2.  Income, Continued

k. Active Military Applicant’s Income (continued) Verification (continued)

If the date is within 12 months of the anticipated date that the loan will close, the loan package must also include one of the following four items, or combinations of items, to be acceptable:

  • documentation that the servicemember has already re-enlisted or extended his/her period of active duty to a date beyond the 12-month period following the projected closing of the loan, or
  • verification of a valid offer of local civilian employment following the release from active duty.  All data pertinent to sound underwriting procedures (date employment will begin, earnings, and so on) must be included, or
  • a statement from the servicemember that he/she intends to reenlist or extend his/her period of active duty to a date beyond the 12 month period, plus
  • a statement from the servicemember’s commanding officer confirming that:

-    the servicemember is eligible to reenlist or extend his/her active duty as indicated, and

-    the commanding officer has no reason to believe that such reenlistment or extension of active duty will not be granted, or

  • documentation of other unusually strong positive underwriting factors, such as:

-    a downpayment of at least 10 percent,

-    significant cash reserves, and

-    clear evidence of strong ties to the community coupled with a nonmilitary spouse’s income so high that only minimal income from the active duty servicemember is needed to qualify.

Analysis:  Base Pay

Consider the applicant’s base pay as stable and reliable except if the applicant is within 12 months of release from active duty.

  • Analyze the additional documentation submitted.
  • If the applicant will not be reenlisting, determine whether:

-    the applicant’s anticipated source of income is stable and reliable, and/or

-    unusually strong underwriting factors compensate for any unknowns regarding future sources of income.

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2.  Income, Continued

k. Active Military Applicant’s Income (continued) Analysis:  Military Quarters Allowance

The lender may include a military quarters allowance in effective income if properly verified.  In most areas there will be an additional variable housing allowance, which can also be included.

The military quarters and variable housing allowances are not taxable income.

Ensure that the applicant meets the occupancy requirements set forth in section 5 of chapter 3.

Verification:  Subsistence and Clothing Allowances

Any subsistence (rations) and clothing allowances are indicated on the LES.

 

Analysis:  Subsistence and Clothing Allowances

The lender may include verified allowances in effective income.  These allowances are not taxable income.

Note:  The clothing allowance generally appears on the LES as an annual amount.  Convert it to a monthly amount for the loan analysis.

Verification:  Other Military Allowances

To consider a military allowance in the underwriting analysis, obtain verification of the type and amount of the military allowance, and how long the applicant has received it.

Analysis:  Other Military Allowances

Examples include propay, flight or hazard pay, overseas pay, and combat pay.

All of these are subject to periodic review and/or testing of the recipient to determine continued eligibility.  These types of allowances are considered taxable income by the IRS, unlike housing, clothing, and subsistence allowances.

Military allowances may be included in effective income only if such income can be expected to continue because of the nature of the recipient’s assigned duties.

Example:  Flight pay verified for a pilot.  If duration of the military allowance cannot be determined, this source of income may still be used to offset obligations of 10 to 24 months duration.

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2.  Income, Continued

l. Income from Service in the Reserves or National Guard
Income derived from service in the Reserves or National Guard may be included in effective income if the length of the applicant’s total active and Reserve/Guard service indicates a strong probability that the Reserve/Guard income will continue. 

Otherwise, this income may be used to offset obligations of 10 to 24 months duration.

m. Recently Activated Members of the Reserve or National Guard
Lenders must consider if an applicant, whose income is being used to qualify for a loan, may have a change in income due to participation in a Reserves/ National Guard unit subject to activation. 

If so, lenders must determine what the applicant’s income may be if activated: 

  • Reduced, carefully evaluate the impact the reduction may have on the borrower’s ability to repay the loan. 
  • Increased, consider the likelihood the income will continue beyond a 12-month period. 

 

Example:  If an activated reserve/guard member applies for a loan, they may present orders indicating their tour of duty is not to exceed 12 months.  Under these circumstances lenders need to carefully evaluate both the present income (current employment) and expected income (reservist income) in terms of income stability and reliability.

There are no clear-cut procedures that can be applied to all cases.  Evaluate all aspects of each individual case, including credit history, accumulation of assets, overall employment history, etc., and make the best decision for each loan regarding the use of income in qualifying for the loan. 

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2.  Income, Continued

m. Recently Activated Members of the Reserve or National Guard (continued) It is very important that loan files be carefully and thoroughly DOCUMENTED, including any reasons for using or not using reservist income in these situations. 

Weigh the desire to provide a veteran their benefit with the responsibility to ensure the veteran will not be placed in a position of financial hardship.

Lenders should contact the appropriate VA office if any questions arise in reference to unusual circumstances regarding a mobilized servicemember’s income.

n. Income of Recently Discharged Veterans
Verification

Obtain verification of any of the following which apply:

  • employment income

 

Reference:  See “Income from Non-Military Employment” in this section for verification requirements.

  • retirement income, and
  • military separation payments.

 

If the applicant has been employed in a position for only a short time, obtain a statement from the employer that the applicant is performing the duties of the job satisfactorily and the probability of continued employment is favorable.

Analysis:  Prospects for Continued Employment

Cases involving recently discharged veterans often require the underwriter to exercise a great deal of flexibility and judgment in determining whether the employment income will continue in the foreseeable future.  This is because some veterans may have little or no employment experience other than their military occupation.  Continuity of employment is essential for a veteran with no retirement income or insufficient retirement income to support the loan obligation.

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2.  Income, Continued

n. Income of Recently Discharged Veterans (continued) For recently discharged veterans who have been in their new jobs only a very short time, analyze prospects for continued employment as follows:

  • If the duties the applicant performed in the military are similar or directly related to the duties of the present position, use this as one indicator that the employment is likely to continue.
  • If the applicant’s current job requires skills for which the applicant has had no training or experience, greater time in the current job may be needed to establish stability.

 

If the applicant’s retirement income, compared to total estimated shelter expense, long-term debts, and family living expense is such that only minimal income from employment is necessary to qualify from the income standpoint, resolve doubt in favor of the applicant.

Examples:

Qualifying short-term employment – An applicant who was an airplane mechanic in the military is now employed as an auto mechanic or machinist. 

Nonqualifying short-term employment – An applicant who was an Air Force pilot is now employed as an insurance salesperson on commission. 

Most cases fall somewhere between these extremes.  Fully develop the facts of each case in order to make a determination.

Apply the guidelines under “Self-Employment Income” in this section to a recently discharged veteran who is self-employed.

 

Analysis:  Voluntary Separation Payments

Two types of voluntary separation payments are used to facilitate military downsizing:

 

(1)  Special Separation Benefit (SSB)

 

  • A one-time lump sum,
  • Taxable in the year received, and
  • Treat the same as any substantial cash reserve.

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2.  Income, Continued

n. Income of Recently Discharged Veterans (continued) (2) Voluntary Separation Incentive (VSI)

 

  • Annual payments
  • Taxable in the year received
  • Include in effective income
  • Calculated by multiplying the veteran’s years of service times two
  • Requires a minimum of 6 years service (equates to a minimum of 12 years annual payments)

 

If the veteran receives both VSI and VA disability compensation payments, the VSI is reduced by the amount of disability compensation.  However, if the disability compensation is related to an earlier period of service and the VSI a later period of service, the VSI is not reduced by the amount of disability compensation.

VSI is reduced by the amount of any base pay or compensation a member receives for active or reserve service, including inactive duty training.

The veteran can designate a beneficiary for VSI payments in the event of death.

 

o. Rental Income
Verification:  Multi-Unit Property Securing the VA Loan

Verify:

  • cash reserves totaling at least 6 months mortgage payments (principal, interest, taxes, and insurance – PITI), and
  • documentation of the applicant’s prior experience managing rental units or other background involving both property maintenance and rental.

 

Analysis:  Multi-Unit Property Securing the VA Loan

Include the prospective rental income in effective income only if:

  • evidence indicates the applicant has a reasonable likelihood of success as a landlord, and
  • cash reserves totaling at least 6 months mortgage payments are available.

 

The amount of rental income to include in effective income is based on 75 percent of:

  • verified prior rent collected on the units (existing property), or
  • the appraiser’s opinion of the property’s fair monthly rental (proposed construction).

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2.  Income, Continued

o. Rental Income (continued) Note:  A percentage greater than 75 percent may be used if the basis for such percentage is adequately documented.

Verification:  Rental of the Property Applicant Occupied Prior to the New Loan

Obtain a copy of the rental agreement on the property, if any.

Analysis:  Rental of the Property Applicant Occupied Prior to the New Loan

Use the prospective rental income only to offset the mortgage payment on the rental property and only if there is no indication that the property will be difficult to rent.  This rental income may not be included in effective income.

Obtain a working knowledge of the local rental market.  If there is no lease on the property, but the local rental market is very strong, the lender may still consider the prospective rental income for offset purposes.

Verification:  Rental of Other Property Not Securing the VA Loan

Obtain the following:

  • documentation of cash reserves totaling at least 3 months mortgage payments (principal, interest, taxes, and insurance – PITI), and
  • individual income tax returns, signed and dated, plus all applicable schedules for the previous 2 years, which show rental income generated by the property.

 

Analysis:  Rental of Other Property Not Securing the VA Loan

Rental income verified as stable and reliable may be included in effective income.  If there is little or no prior rental history on the property, make a determination based on review of:

  • documentation of the applicant’s prior experience managing rental units or other background involving both property maintenance and rental
  • any leases on the property, and
  • the strength of the local rental market.

 

Property depreciation claimed as a deduction on the tax returns may be included in effective income.

Continued on next page


2.  Income, Continued

p. Alimony, Child Support, and Maintenance Payments
See “ECOA Considerations” in this section.

Verify the income if the applicant wants it to be considered.  The payments must be likely to continue in order to include them in effective income.

Factors used to determine whether the payments will continue include, but are not limited to:

  • whether the payments are received pursuant to a written agreement or court decree,
  • the length of time the payments have been received,
  • the regularity of receipt, and
  • the availability of procedures to compel payment.
q. Automobile or Similar Allowances
Generally, automobile allowances are paid to cover specific expenses related to an applicant’s employment, and it is appropriate to use such income to offset a corresponding car payment. 

However, in some instances, such an allowance may exceed the car payment.  With proper documentation, income from a car allowance which exceeds the car payment can be counted as effective income.  Likewise, any other similar type of allowance which exceeds the specific expenses involved may be added to gross income to the extent it is documented to exceed the actual expense.

Continued on next page


2.  Income, Continued

r. Other Types of Income
If it is reasonable to conclude that other types of income will continue in the foreseeable future, include it in effective income.  Otherwise, consider whether it is reasonable to use the income to offset obligations of 10 to 24 months duration.

“Other” types of income which may be considered as effective income include, but are not limited to:

  • pension or other retirement benefits,
  • disability income,
  • dividends from stocks,
  • interest from bonds, savings accounts, and so on, and
  • royalties.

 

The lender may include verified income from public assistance programs in effective income if evidence indicates it will probably continue for 3 years or more.

The lender may include verified workers’ compensation income that will continue in the foreseeable future, if the veteran chooses to reveal it.

The lender may include verified income received specifically for the care of any foster child(ren).  Generally, foster care income is to be used only to balance the expenses of caring for the foster child(ren) against any increased residual income requirements.

Do not include temporary income items such as VA educational allowances and unemployment compensation in effective income.

Exception:

If unemployment compensation is a regular part of the applicant’s income due to the nature of his or her employment (for example, seasonal work), it may be included.


3.  Income Taxes and Other Deductions from Income

Change Date
April 10, 2009, Change 10

  • This section has been updated to make minor grammatical edits.
a. Income Tax and Social Security Deductions
Determine the appropriate deductions for Federal income tax and Social Security using the “Employer’s Tax Guide,” Circular E, issued by the Internal Revenue Service.

Determine the appropriate deductions for state and local taxes using similar materials provided by the states.

The lender may consider the applicant’s potential tax benefits from obtaining the loan (for example, mortgage interest deduction) in the analysis.  To do so:

  • determine what the applicant’s withholding allowances will be, using the instructions and worksheet portion of IRS Form W-4, Employee’s Withholding Allowance Certificate, and
  • apply that withholding number when calculating Federal and state income tax deductions.

Continued on next page


3.  Income Taxes and Other Deductions from Income, Continued

b. Income Tax Credits from Mortgage Credit Certificates
Mortgage Credit Certificates (MCCs) issued by state and local governments may qualify a borrower for a Federal tax credit.  The Federal tax credit is based on a certain percentage of the borrower’s mortgage interest payment.

Lenders must provide a copy of the MCC to VA with the loan package which indicates:

  • the percentage to be used to calculate the tax credit, and
  • the amount of the certified indebtedness.  The certified indebtedness can be comprised of a loan incurred by the veteran to acquire a principal residence or a qualified home improvement or rehabilitation loan.

 

If the percentage on the MCC is more than 20 percent, there is an annual limit on the tax credit equal to the lesser of $2,000 or the borrower’s maximum tax liability.  Calculate the tax credit by applying the specified percentage to the interest paid on the certified indebtedness.  Then, apply the annual limit.

Example:  The MCC shows a 30-percent rate and $100,000 certified indebtedness.  The borrower will pay approximately $8,000 in annual mortgage interest.  Borrower’s estimated total Federal income tax liability is $9,000.  Calculate the tax credit as follows:

  • 30 percent of $8,000 = $2,400
  • Apply the annual $2,000 limit
  • The tax credit will be $2,000
  • Use $167 (one-twelfth of $2,000) in the monthly analysis

 

Note:  If the mortgage on which the borrower pays interest is greater than the amount of certified indebtedness, limit the interest used in the tax credit calculation to that portion attributable to the certified indebtedness.


4.  Assets

Change date
April 10, 2009, Change 10

  • This section has been updated to correct hyperlinks and make minor grammatical edits.
a. Amount of Cash Required
The applicant or spouse must have sufficient cash to cover:

  • any closing costs or points which are the applicant’s responsibility and are not financed in the loan,
  • the downpayment, if a GPM, and
  • the difference between the sales price and the loan amount, if the sales price exceeds the reasonable value established by VA.

 

VA does not require the applicant to have additional cash to cover a certain number of mortgage payments, unplanned expenses, or other contingencies.

However, the applicant’s ability to accumulate liquid assets and the current availability of liquid assets for unplanned expenses should be considered in the overall credit analysis.

b. Verification Requirement
Verify all liquid assets owned by the applicant or spouse to the extent they are needed to close the loan.  In addition, verify any liquid assets that may have a bearing on the overall credit analysis; that is, significant assets.

  • Use VA Form 26-8497a, Request for Verification of Deposit, as appropriate, OR
  • original or certified true copies of the applicant’s last two bank statements, OR
  • the borrower’s bank statements available to them by Internet or Faxed from the depository directly to the lender.  In cases where the lending institution uses Internet based verifications, ensure the URL appears on the document.

 

Verifications must be no more than 120 days old (180 days for new construction).

For automatically closed loans, this means the date of the deposit verification is within 120 days of the date the note is signed (180 days for new construction).

Continued on next page


4.  Assets, Continued

b. Verification Requirement (continued) For prior approval loans, this means the date of the deposit verification is within 120 days of the date the application is received by VA (180 days for new construction).
c. 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 make a downpayment or pay closing costs on the VA loan. 

In addition, the lender may want to consider the amount of equity the applicant has accumulated in the property and the extent to which that equity is attributable to the applicant’s investment rather than the housing market, in evaluating the applicant’s ability to manage assets.

The lender may consider any downpayment or costs on the VA loan as provided for by the sale of the property if available information provides a reasonable basis for concluding the equity to be realized from the sale will be sufficient for this purpose. 

References

  • See section 4 of chapter 5 for prior approval loans which depend upon the sale of property for the borrower to qualify.
  • See section 6 of chapter 5 for required loan closing documents.

 


5.   Debts and Obligations

Change Date
April 10, 2009, Change 10

  • This section has been updated to correct hyperlinks and make minor grammatical edits.
a. Verification
Significant debts and obligations of the applicant must be verified and rated.

Obtain a credit report. 

Reference:  See section 7 of this chapter for details on the type of credit report required.

For obligations not included on the credit report which are revealed on the application or through other means, the lender must obtain a verification of deposit showing the obligation or other written verification directly from the creditor.  The lender must also separately verify accounts listed as “will rate by mail only” or “need written authorization.”

When a pay stub or LES statement indicates an allotment, the lender must investigate the nature of the allotment to determine whether the allotment is related to a debt.

For obligations that have not been rated on the credit report or elsewhere, obtain the verification and rating directly from the creditor.  Include a written explanation for any obligation that is not rated.

Resolve all discrepancies.  If the credit report or deposit verification reveals significant debts or obligations which were not divulged by the applicant:

  • obtain clarification as to the status of such debts from the applicant, then
  • verify any remaining discrepancies with the creditor.

 

Continued on next page


5.   Debts and Obligations, Continued

a. Verification (continued)
Credit reports and verifications must be no more than 120 days old (180 days for new construction).

For automatically closed loans, this means the date of the credit report or verification is within 120 days of the date the note is signed (180 days for new construction).

For prior approval loans, this means the date of the credit report or verification is within 120 days of the date the application is received by VA (180 days for new construction).

ECOA prohibits requests for, or consideration of, credit information on a spouse who will not be contractually obligated on the loan except:

  • if the applicant is relying on alimony, child support, or maintenance payments from the spouse (or former spouse), or
  • in community property states.

              -If the property is located in a community property state, VA requires consideration of the spouse’s credit information (whether or not the spouse will be personally liable on the note and whether or not the applicant and spouse choose to have the spouse’s income considered).

b. Verification of Alimony and Child Support Obligations
The payment amount on any alimony and/or child support obligation of the applicant must be verified.

Do not request documentation of an applicant’s 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.

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5.   Debts and Obligations, Continued

c. Analysis of Debts and Obligations
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 5 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 have an impact on the applicant’s ability to provide for family living expenses.

If a married veteran wants to obtain the loan in his or her name only, the veteran may do so without regard to the spouse’s debts and obligations in a non-community property state.  However, in community property states, the spouse’s debts and obligations must be considered even if the veteran wishes to obtain the loan in his or her name only.

Debts assigned to an ex-spouse by a divorce decree will not generally be charged against a veteran-borrower.  This includes debts that are now delinquent.

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5.   Debts and Obligations, Continued

d. 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.
e. 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 downpayment 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(s) 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.

References

See section 4 of chapter 5 for prior approval loans dependent upon the sale of property for the borrower to qualify.

See section 6 of chapter 5 for required loan closing documents.

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5.   Debts and Obligations, Continued

f. Secondary Borrowing
If the applicant plans to obtain a second mortgage simultaneously with the VA-guaranteed loan include the second mortgage payment as a significant debt.

Reference:  See section 4 of chapter 9 for VA limitations on secondary borrowing.

From an underwriting standpoint, the veteran must not be placed in a substantially worse position than if the entire amount borrowed had been guaranteed by VA.

g. Deferred Student Loan Payments
If student loan repayments are scheduled to begin within 12 months of the date of VA loan closing, lenders should consider the anticipated monthly obligation in the loan analysis.  If the borrower is able to provide evidence that the debt may be deferred for a period outside that timeframe, the debt need not be considered in the analysis.
h. Loans Secured By Deposited Funds
Certain types of loans secured against deposited funds (signature loans, cash value life insurance policies, 401K loans, etc…) in which repayment may be obtained through extinguishing the asset, do not require repayment consideration for loan qualification. 

Note: Assets securing these loans may not be included as an asset in the loan analysis. 

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