VA DTI Manual Underwriting Guidelines On VA Loans

Gustan Cho Associates are mortgage brokers licensed in 48 states

In this blog, we 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.

Benefits of VA Loans

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 and/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 and/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. A large percentage of our borrowers at Gustan Cho Associates are manual underwriting VA loans.

Qualifying For VA Loans

Not all borrowers can qualify for VA Loans. Only active and/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 and/or retired members of our U.S. Military. Members need to have a valid Certificate of Eligibility. 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 and/or lender credit. It is very 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. In this article, we will discuss and cover VA DTI Manual Underwriting Guidelines On VA Loans.

Credit And DTI Guidelines On VA Mortgages

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

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 that are 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 just go off the automated findings of the automated underwriting system (AUS) and have zero lender overlays.

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 is taken into consideration 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 2 years, it needs to be manually underwritten.

VA DTI Manual Underwriting Guidelines For High DTI Borrowers

VA DTI Manual Underwriting

There is really no set VA DTI Manual Underwriting Guidelines. However, most manual underwriting VA Loans should not exceed 55% DTI. In order 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 timely payments for the past 24 months
  • Verification of rent
  • Traditional or non-traditional credit tradelines
  • 2 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 Chapter 13 Bankruptcy discharged date

VA Manual Underwriting Versus Automated Underwriting System Approval

In the following paragraphs,  we will 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 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.

Difference Between Manual Versus AUS Underwriting on VA Loans

VA Manual Versus AUS Underwriting has its own guidelines. 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. 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 a solid automated approval.
  • Refer/Eligible which means the automated system cannot make a decision and needs to be manually underwritten by a mortgage underwriter.
  • Refer/With Caution means that 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 go through a manual underwrite on FHA and/or VA loans.

AUS Approval Downgraded To Manual Underwriting

Other times when a VA Manual Versus AUS Underwriting is required is 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 a consumer disputes a negative derogatory credit tradeline, their credit scores will go up. 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 in 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 balance 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 the total of all non-medical credit disputes on aggregate collection accounts total less than $1,000, every creditor on the list of disputed accounts do 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

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 needs to be in the Chapter 13 Repayment plan for at least twelve months. The borrower needs to provide proof of 12 monthly canceled checks and/or 12 months of bank statements to show timely payments to the bankruptcy trustee. Assigned Chapter 13 Bankruptcy Trustee needs to approve the purchase and/or refinance.  Most bankruptcy trustees will not deny a home purchase and/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 manual underwriting. 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 Chapter 13 Bankruptcy repayment plan with no late payments. There is no waiting period after 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 need to 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.

Importance of Compensating Factors on Manual Underwriting for Borrowers with High Debt to Income Ratios

With no compensating factors, the maximum debt to income ratios on VA loans is 31% front end and 43% back end. With one compensating factor, the maximum debt to income ratios 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 Underwriter Discretion on Manual Underwriting

Mortgage underwriters have a lot of discretion on manual underwrites. If a mortgage underwriter manually underwriting an FHA and/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

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 and/or $100.
  • Second and/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 strong savings.
  • Reserves: One month’s reserves are required on manual underwrites.
  • One month of reserves is equivalent to one month of principal, interest, taxes, 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.

Starting The Mortgage Loan Application Process With A Lender With No Lender Overlays

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 and/or VA Loans via manual underwriting with an aggressive national mortgage company licensed in multiple states with no overlays on government and/or conventional loans, please contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at [email protected] 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 and/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 7 days a week, evenings, weekends, and holidays.