VA DTI Manual Underwriting Guidelines on VA Loans

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This blog will discuss the VA DTI manual underwriting guidelines on VA loans. VA loans are one of the best loan programs in the United States. Lenders offer 100% financing with no down payment required at lower mortgage rates than conventional loans due to the government guarantee. There is no maximum loan limit on VA loans. John Strange, a senior loan officer at Gustan Cho Associates, explains the many benefits of VA loans as follows:

The Veterans Administration insures VA loans to private lenders where lenders can offer VA loans with 100% financing, no minimum credit score, no maximum debt-to-income ratio, and no maximum loan limits. There is no mortgage insurance required on VA loans. The Veterans Administration made VA Agency Mortgage Guidelines more lenient than other government loan programs. Data suggests that active or retired members of the U.S.

Armed Services have lower credit profiles than their civilian counterparts. This is mainly due to members of the U.S. military being transferred to other military bases or being deployed overseas. VA and FHA loans are the only two home mortgage programs that allow manual underwriting. Not all lenders do manual underwriting on VA loans. Many of our borrowers at Gustan Cho Associates are manually underwriting VA loans.

Learn more about VA DTI Manual Underwriting Guidelines with us.

Qualifying For VA Loans

Not all borrowers can qualify for VA Loans. Only active or retired members of the U.S. Armed Services with a certificate of eligibility (COE) are eligible to qualify for VA loans. VA loans are only limited to active duty or retired members of our U.S. Military. Members need to have a valid Certificate of Eligibility. Alex Carlucci, a senior loan officer at Gustan Cho Associates, explains the difference between manual underwrites and the automated underwriting system approvals on VA loans as follows:

The lower debt-to-income ratio guidelines are the only difference between the VA manual versus AUS Underwriting. For example, VA does not have a debt-to-income ratio cap on an automated underwriting system. As long as the borrowers meet the residual income requirements, the AUS may get a borrower approve/eligible per AUS FINDINGS with debt-to-income ratios higher than 60% DTI. That is not the case with manual underwriting. The maximum debt-to-income ratio borrowers can get on a manual underwrite is 50% DTI with two compensating factors on a manual underwrite.

Certificate of Eligibility is also referred to as COE. VA offers 100% financing where borrowers do not have to come up with any down payment. Closing costs can be covered by seller concessions or lender credit. It is possible for borrowers to purchase homes with VA loans with zero money out of pocket. Gustan Cho Associates is a mortgage company licensed in multiple states with no lender overlays on VA loans. This article will discuss and cover VA DTI manual underwriting guidelines On VA loans.

Credit And DTI Guidelines On VA Mortgages

VA has no debt-to-income ratio requirements on VA Loans that get approved/eligible per the automated underwriting system. As long as Fannie Mae or Freddie Mac AUS renders an approve/eligible, the borrower meets all VA Guidelines and has sufficient residual income, there is no maximum cap on DTI on VA loans. Why do lenders require no more than a 45% to 50% debt-to-income ratio if this is the case? VA also does not have any credit score requirements. Why do lenders have different credit score requirements, like requiring 620 to 640 credit scores if this is the case?

VA Lender Overlays

The reason why lenders require debt-to-income ratio requirements and have credit score requirements is due to their lender overlays. Most lenders have overlays on VA Loans.

Lenders require borrowers to meet minimum VA Agency Guidelines. However, lenders can have higher lending requirements above and beyond the minimum VA Agency Guidelines called lender overlays.

Gustan Cho Associates is a national mortgage company licensed in multiple states with no lender overlays on VA mortgages. We go off the automated findings of the automated underwriting system (AUS) and have zero lender overlays.

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Automated Approval Versus VA DTI Manual Underwriting Guidelines

I have gotten approve/eligible per the automated underwriting system on VA borrowers with 580 credit scores and 65% debt-to-income ratios. VA DTI manual underwriting guidelines are different. Debt-to-income ratios are considered on VA loans when it comes to manual underwriting. VA and FHA loans allow for manual underwriting.  Manual Underwriting is when the automated underwriting system renders a refer/eligible per AUS. Or borrowers who are in an active Chapter 13 Bankruptcy Repayment plan need to be manually underwritten. Also, if the borrower has a recent Chapter 13 Bankruptcy discharge and the discharge is seasoned less than two years, it must be manually underwritten.

VA DTI Manual Underwriting Guidelines For High DTI Borrowers

There is no set VA DTI Manual Underwriting Guidelines. However, most manual underwriting VA Loans should not exceed 55% DTI. To get DTI as high as 55% or higher, borrowers should have two or more compensating factors. Here are examples of compensating factors:

• Low payment shock of 5% or less 
• A large down payment is a compensating factor
• Three months reserves
• Manual underwriting requires one-month reserves
• Part-time or other documented income that is not used as qualified income
• Large residual income
• Non-borrowing spouse
• Job longevity
• History of getting promotions and pay raises

General Manual Underwriting Guidelines

Not all lenders allow manual underwriting on VA and FHA Loans. Gustan Cho Associates is a mortgage company licensed in multiple states with no lender overlays on VA Mortgages. A large percentage of our business is VA Manual Underwriting borrowers. Here are the basic VA Manual Underwriting Guidelines:

• Timely payments on all payments for the past 12 months
• Some lenders will go back to timely payments for the past 24 months
• Verification of rent
• Traditional or non-traditional credit tradelines
• Two years out of bankruptcy, foreclosure, short sale, deed-in-lieu of foreclosure
• Borrowers in an active Chapter 13 Bankruptcy Repayment plan can qualify after 12 timely payments to their Bankruptcy Trustee.
• No waiting period after the Chapter 13 Bankruptcy discharge date

VA Manual Versus Automated Underwriting System Approval

The following paragraphs discuss and cover the VA manual versus AUS underwriting on VA loans. VA and FHA Loans are the only two mortgage loan programs that allow manual underwriting.  Manual underwriting is when a borrower cannot get an approve/eligible per automated underwriting system (AUS).

A borrower who gets a refer/eligible per AUS can qualify for VA Manual Versus AUS Underwriting. This holds true only if the borrower has made timely payments in the past 24 months.

Manual underwriting means when the automated underwriting system cannot render an automated approval and needs a human underwriter to manually underwrite the mortgage loan if the findings come out to be referred/eligible per AUS. Borrowers who get an approve/eligible per automated underwriting system with credit disputes can get the file downgraded to a manual underwrite if they do not want to retract the credit disputes.

When Is VA Manual Versus AUS Underwriting Required

When a mortgage applicant cannot get an approve/eligible per automated underwriting system (AUS) and gets a refer/eligible per AUS, then the borrower may be eligible to qualify for a manual underwrite on VA loans. There are three different types of finding on an automated underwriting system (AUS):

• Approve/Eligible, which means that the borrower has solid automated approval.
• Refer/Eligible means the automated system cannot decide and needs to be manually underwritten by a mortgage underwriter.
• Refer/With Caution means the borrower does not qualify for a VA home loan.

Borrowers who get refer/eligible per AUS FINDINGS can be downgraded to a manual underwrite. FHA and VA loans are the only two home mortgage programs that allow manual underwriting. Lenders do not manually underwrite conventional loans. Borrowers who meet manual underwriting agency guidelines can undergo manual underwrite on FHA or VA loans.

AUS Approval Downgraded To Manual Underwriting

A VA Manual Versus AUS Underwriting is also required when borrowers with lower credit scores have outstanding credit disputes. Credit disputes during the mortgage process are not allowed. Credit disputes automatically discount the negative credit scoring formula. Therefore, when consumers dispute a negative, derogatory credit tradeline, their credit scores increase. However, if consumers retract credit disputes, the opposite effect takes place.

Credit Disputes on Non-Medical Credit Tradelines

Retracting credit disputes will drop consumer credit scores. This is because when consumers retract credit disputes, the credit scoring formula at the credit bureaus will factor the negative credit disputed back into the scoring formula. Therefore, the negative factor of the retracted dispute will drop the credit scores. However, medical credit disputes are exempt from retraction. You do not have to retract medical credit disputes.

Credit Disputes Exempt From Retraction During The Mortgage Process

Non-medical credit disputes with zero outstanding balances are exempt from credit disputes. You do not have to remove non-medical credit disputes with zero outstanding balance reporting on credit reports.

Non-medical credit disputes older than 24 months old do not have to be removed and are exempt from retraction.

If all non-medical credit disputes on aggregate collection accounts total less than $1,000, every creditor on the list of disputed accounts does not have to be removed. Borrowers with lower credit scores and active credit disputes may want to downgrade their file to a manual underwrite if they do not want to retract credit disputes.

VA During And After Chapter 13 Bankruptcy

Homebuyers can qualify for VA Loans during a Chapter 13 Bankruptcy repayment plan via manual underwriting. The borrower must be in the Chapter 13 Repayment plan for at least twelve months. The borrower must provide proof of 12 monthly canceled checks or 12 months of bank statements to show timely payments to the bankruptcy trustee. Assigned Chapter 13 Bankruptcy Trustee needs to approve the purchase or refinance.  Most bankruptcy trustees will not deny a home purchase or refinance.

FHA and VA Loans During Chapter 13 Bankruptcy Repayment Plan

The Chapter 13 Bankruptcy bankruptcy does not need to be discharged. All Chapter 13 Bankruptcy repayment mortgage files will need to be manually underwritten. FHA and VA loans are the two-only mortgage programs that allow manual underwriting.

FHA and VA loans are the only two—timely payments throughout the Chapter 13 Bankruptcy repayment plan with no late payments.

There is no waiting period after the Chapter 13 Bankruptcy discharge date with a manual underwrite. Any bankruptcies during a repayment plan or that have not been seasoned for at least two years from a discharged date must be manually underwritten.

VA Manual Underwriting Guidelines

Manual Underwriting does have a few hurdles versus automated approvals. One is debt-to-income ratio caps. VA does not have a maximum debt-to-income ratio requirement nor a minimum credit score requirement. However, with manual underwriting, the VA wants the cap the debt-to-income ratio to no greater than 50% DTI on manual underwrites. This holds true as long as the borrower has two compensating factors. Get Qualify for VA loan. Click here!

Compensating Factors on Manual Underwriting for High Debt to Income Ratios

With no compensating factors, the maximum debt-to-income ratio on VA loans is 31% front end and 43% back end. With one compensating factor, the maximum debt-to-income ratio on manually underwritten VA loans is capped at 37% front-end and 47% back-end.

If borrowers have two compensating factors, VA allows up to 40% front-end and 50% back-end debt-to-income ratios.

Compensating Factors are positive factors viewed by lenders.  Mortgage underwriters have a lot of discretion on manual underwrites. If a mortgage underwriter manually underwriting an FHA or VA loan sees multiple compensating factors, the underwriter can go over the 40% front end and 50% back end recommended maximum debt-to-income ratios.

Importance of Compensating Factors on Higher Risk Manual Underwriting Borrowers

Mortgage underwriters are considered about high debt-to-income ratios on manual underwrites. Compensating factors are important for borrowers with higher debt-to-income ratios. Here are examples of compensating factors:

• Low Payment Shock of 5% or less or $100.
• Second or other income with at least one-year seasoning that has not been used as qualifying income, such as a part-time job.
• Longevity on the same job and field of employment.
• History of getting consistent promotions and wages.
• Working spouse with full-time employment and good income but not on the mortgage note.
• History of saving money and having substantial savings.
• Reserves: One month’s reserves are required on manual underwrites.
• One month of reserves equals one month of principal, interest, taxes, and insurance (P.I.T.I.)
• Three months of reserves of P.I.T.I. is considered a strong compensating factor.

A larger down payment shows strength and skin in the game of borrowers.

Frequently Asked Questions (FAQs)

1. What are VA DTI Manual Underwriting Guidelines?
   VA DTI (Debt-to-Income) Manual Underwriting Guidelines refer to the specific rules and criteria the Department of Veterans Affairs sets for manually underwritten VA loans, especially regarding debt-to-income ratios.
2. What is manual underwriting in the context of VA loans?
   Manual underwriting is when a human underwriter evaluates a loan application without relying solely on automated systems. This is often necessary when the borrower’s financial situation needs to meet automated approval standards.
3. What is DTI, and why is it important for VA loans?
   DTI, or Debt-to-Income ratio, assesses a borrower’s monthly debt obligations relative to their total monthly income. It’s crucial for VA loans as it helps lenders assess the borrower’s ability to manage additional debt alongside their mortgage payments.
4. What is the maximum DTI ratio for VA loans under manual underwriting?
   The maximum DTI ratio for VA loans under manual underwriting typically varies but generally falls around 41%. However, exceptions can be made based on compensating factors.
5. What are compensating factors, and how do they affect DTI limits?
   Compensating factors are positive aspects of a borrower’s financial profile that offset weaknesses. Examples include significant cash reserves, a stable employment history, or a high credit score. Strong compensating factors may allow borrowers to qualify with a higher DTI ratio.
6. Are there any specific requirements for residual income in manual underwriting?
   Yes, residual income requirements are crucial in manual underwriting. Borrowers must have sufficient residual income after accounting for their mortgage payments, taxes, insurance, and other debts. The residual income thresholds vary based on family size and location.
7. How does manual underwriting affect the loan approval process for VA loans?
   Manual underwriting involves a more thorough review of the borrower’s financial situation than automated underwriting. It may take longer to process, but it can provide an opportunity for borrowers who still need to meet automated approval criteria to secure a loan.
8. What documentation is typically required for manual underwriting of VA loans?
   Documentation requirements for manual underwriting of VA loans usually include proof of income, assets, employment history, credit history, and explanations for derogatory credit events or significant financial obligations.
9. Can borrowers with non-traditional credit histories qualify under manual underwriting?
   Yes, borrowers with non-traditional credit histories, such as those without extensive credit card or loan history, may still qualify under manual underwriting. To assess creditworthiness, lenders may consider alternative credit data, such as rental payments, utility bills, or other recurring payments.
10. How can borrowers improve their chances of approval under manual underwriting?
    Enhancing the likelihood of approval is achievable for borrowers by maintaining a stable employment history, reducing existing debt obligations, saving for a larger down payment, and addressing any negative credit issues. Strong compensating factors can also help offset weaknesses in the application.

Starting The Mortgage Process With A Lender With No Overlays on VA Loans

Not all lenders offer manual underwriting. Many lenders have lender overlays on manual underwriting and do not want to take on any manual underwrites. Borrowers who need to qualify for FHA or VA Loans via manual underwriting with an aggressive national mortgage company licensed in multiple states with no overlays on government or conventional loans, please get in touch with us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at alex@gustancho.com.

Gustan Cho Associates is a one-stop mortgage shop. We offer non-QM and alternative finance mortgage programs such as one day out of bankruptcy or foreclosure, 12 months bank statement loans for self-employed borrowers, asset-depletion mortgage programs, and investment loan programs for real estate investors. The team at Gustan Cho Associates is available seven days a week, evenings, weekends, and holidays. Find a lender for your mortgage with no overlay on VA loans, Click here!