VA Manual Underwriting Guidelines on VA Home Loans
This blog will cover VA Manual Underwriting Guidelines on VA home loans. As a veteran or active-duty service member, the dream of owning a home is a shared aspiration we all strive to fulfill. Fortunately, the Department of Veteran Affairs (VA) is dedicated to assisting you in realizing this dream through a loan program that provides highly favorable terms, paving a clear and accessible path toward your homeownership goal.
Just like any other loan, even with the most favorable terms, VA loan borrowers will have to go through a careful evaluation process to assess their financial situation and hence creditworthiness. One aspect that plays a crucial role in determining your eligibility and affordability for the loan and one that the lenders focus on in their evaluation is the debt-to-income (DTI) ratio.
This evaluation process also called the underwriting process, can be carried out through an automated system or manually. So, while automated underwriting systems are commonly used to assess DTI, there are circumstances where manual underwriting comes into play, which presents an opportunity for borrowers who might not meet the standard criteria. In this article, we will tell you everything you need to know about manual underwriting guidelines on DTI ratio for VA home loans and how it can open doors for aspiring
homeowners.
VA manual underwriting Guidelines
Manual underwriting for a mortgage refers to assessing and evaluating a borrower’s loan application without solely relying on automated underwriting systems. Many underwriters typically use computer programs to automate much of the data-gathering and analysis process, which provides a faster and easier way to approve a borrower for a mortgage.
Now, while these systems work great, especially if everything is kept simple and perfect, many borrowers have extenuating circumstances that might require further review, and that’s where manual underwriting comes in. Under manual underwriting, a human underwriter reviews the individual’s financial information and decides based on their circumstances.
VA Manual underwriting is typically used when a borrower’s loan application does not meet the standard requirements of automated underwriting systems, such as having a low credit score or a high debt-to-income (DTI) ratio. It allows the underwriter to take a more in-depth look at the individual’s financial situation and decide based on a comprehensive analysis.
During this process, the underwriter carefully reviews the various aspects of the borrower’s application, including credit history, income, employment stability, debt obligations, and overall financial capability. They may also request additional documentation and perform a thorough assessment to determine the borrower's ability to repay the loan. One key factor in manual underwriting for a VA mortgage is the consideration of residual income. Residual income is the amount left over after deducting the borrower's monthly debts and obligations from their gross monthly income. This, in other words, is what we refer to as the DTI ratio. The VA has specific DTI requirements that consider family size and geographic location to ensure borrowers have enough income to cover their living expenses after paying their debts.
VA manual underwriting guidelines for VA loans
The debt-to-income (DTI) ratio is one of the key financial metrics for lenders regarding VA home loans. This ratio is an underwriting guideline that looks at the relationship between your monthly income and your monthly debt, giving the lenders a clear insight into your purchasing power and ability to repay timely debt. There are two forms of DTI ratio that lenders look at; the front-end ratio and the back-end ratio.
The front-end ratio examines the relationship between the gross monthly income and the new mortgage payment. In contrast, the back-end ratio considers the borrower’s major monthly expenses against the income. For VA underwriting purposes, the underwriters consider only the back-end ratio, as it offers a more holistic look at the borrower’s monthly DTI situation.
The VA doesn’t set a maximum DTI ratio that the borrowers must stay under. Still, it does provide lenders with guidance that additional scrutiny should be placed on borrowers surpassing the 41% level. Remember that the VA doesn’t issue loans, which means that individual lenders offering these loans set the in-house caps on the DTI ratio based on your credit and overall financial situation. DTI ratio calculation – when calculating the DTI ratio for a VA loan, not all types of debts and incomes are included, as the underwriters largely focus on your major revolving and installment debts, particularly those reflected on your credit reports. These are expenses such as car loans, mortgages, student loans, credit card loans, and several others. This doesn’t mean that other costs or obligations are not considered; on the contrary, underwriters will look at costs such as child-care costs, commuting expenses, or alimony, which don’t make it to the credit report but are also crucial. The largest debt factored in your DTI ratio must be the monthly mortgage payment, which will include the principal and interest on the mortgage, plus the estimated escrow amounts for your home insurance and property taxes. Also, the underwriters will include the estimated costs of your monthly utility bills for VA loans. All these debts will be added and then divided by the gross monthly income to create the DTI ratio. You need to understand that underwriters don’t consider borrowers’ income equally, as you find that some forms of income will easily count towards qualifying your loan. In contrast, other forms of income, such as self-employment or overtime income, will often require the borrower to have at least a two-year earning history.
VA and lender DTI benchmarks – VA lenders can set their benchmarks for the maximum allowable DTI ratio based on several factors, including compensating factors. Depending on a borrower's overall credit and lending profile, some lenders will allow a DTI ratio that is even 50% or above. Anyway, if your DTI ratio is above 41%, you may face some additional financial scrutiny, including the following;
VA residual income
You will need extra residual income if you qualify for a VA loan with a higher DTI. This income is the amount left after an individual pays off all the monthly recurring debts, and the underwriters want to see a certain amount left for them to approve you. This largely depends on the loan amount, ZIP code, and the household size. Marga Jurilla of Mortgage Lenders For Bad Credit explains about residual income guidelines on VA loans.
If your DTI ratio is above 41%, you will need an extra 20% over the usual limit to qualify for the VA loan. This is to say that suppose the lender requires you to have a residue income of about $1800 when your DTI is below 41%, but if you go above this ratio, you will need $2,160 as residue income, a 20% increase.
Tax-free income – when your DTI ratio surpasses the 41% mark, it could be due to tax-free income, such as child support payments, military allowance, or disability benefits, which are not included in your DTI calculations. So, if this applies to you, the underwriters will also consider this income, which will certainly improve your DTI. It’s always recommended to consult with multiple lenders to understand their specific DTI ratio requirements and their flexibility in considering higher ratios.
Debt-To-Income Versus Residual Income on VA Manual Underwriting Loans
Remember that individual lender policies may differ, so exploring various options is crucial to find the best fit for your circumstances. How can you lower your DTI ratio for a VA mortgage approval? Alex Carlucci of Mortgage Lenders For Bad Credit explains the correlation between the debt-to-income ratio versus residual income on VA manual underwriting.
Before applying for a loan, there are a few strategies to lower your DTI ratio so that when it gets to the underwriting stage, you will easily be approved or, better yet, take your ratio to an acceptable range. They include: Eliminating your monthly payments by paying off small debts. Increasing your income – you can also look into other possible income streams or ask for a raise in your current job.
Adding another borrower to the loan – adding another borrower to the application may help you qualify for a VA loan. However, the individual you add needs to have a better credit history. Otherwise, it will end up increasing your DTI ratio even further. Wait for a few months before applying –always take time to get all your financial documents to apply for a VA loan. This will give you time to work on increasing your income and paying off your debt.
Best Mortgage Lenders For VA Manual Underwriting
As we conclude, when we talk of VA loans, whose main goal is to assist veterans and military personnel in fulfilling their homeownership dreams, manual underwriting is a valuable tool that ensures fairness and individual consideration in the loan approval process. Dale Elenteny of Mortgage Lenders For Bad Credit explains VA manual underwriting guidelines in the above video:
The underwriting process can capture the full complexity of your financial situation with its personalized assessment.
When it comes to the DTI guidelines for VA loans, the thorough evaluation process helps the underwriters to gain an in-depth look at the borrower’s ability to make timely monthly payments. As the borrower, with the above guidelines, you can navigate the loan application process confidently and, most importantly, be aware of what the underwriters will look for regarding your DTI ratio and how you can strengthen your case.
