Tips & Special Topics
Special Circumstances in the VA Loan Qualifying Process
Added February 22, 2010 | Updated February 22, 2010
Many VA lenders use an automated VA underwriter, or computerized qualifying system, to “read” income and credit numbers to determine whether or not a borrower meets the VA Home Loan Guaranty Program requirements. However, there may be circumstances that require a closer look from manual underwriters (people with special certification for determining VA loan qualification).
If an applicant has extenuating circumstances surrounding his or her financial situation, then the loan may need additional underwriting by a certified VA underwriter. A computer system may not be able to recognize some of the unique situations that need more consideration. These situations might include:
• Bonus, overtime and second-job income
• Self-employment
• Expense accounts for travel
• Employment stability – (There are no duration minimums mandated by the VA for the holding of a job, but lenders may require at least a year with the same employer. If a recent employer change has occurred within the same line of work, for advancement or a salary increase, this may acceptable).
• Notes receivable
• Child support and alimony
• Rental property income
• Foreclosures
• Bankruptcy
• Lack of, or insufficient credit history
In certain cases, bonus, overtime, and second-job income may only be fully considered if they have been continuous for at least two years, and if the continuation of pay can be verified with the employer. Sometimes, if this type of pay has been received for less than two years, the VA underwriter may consider it to offset an applicant’s debt.
For borrowers who have self-employment income, a two-year minimum history may be required. If the borrower has substantial experience or specialized training in the same line of work with another company, then the two-year minimum may be shortened to one year. However, less than one year is generally not sufficient. Self-employment income is defined as any revenue generated by a person with an ownership position of more than 10 percent. Two years tax returns as well as year-to-date financial statements are typically needed for underwriters to consider this type of income. If the business is a corporation, then corporate returns are required.
Expense reimbursement income for hotel rooms, meals, airfare and car rentals are typically not considered by VA underwriters as income. These typically offset costs incurred to employees for work-related travel and are not thought of as earnings.
Notes receivable may be considered as long as a copy of each note is presented by the borrower. Receipt of payments for the previous 12 months must be verified and the note must call for payments to continue for at least five years beyond the date of loan application. If the note is payable before five years, interim payments may be considered by the underwriter to offset an applicant’s debt.
Income from child support and alimony usually requires a copy of the divorce decree or separation agreement. Proof of receipt for the previous 12 months, and continuance of at least five more years is often required for VA underwriters to consider this viable income for VA loan qualification.
Rental property income is calculated using Schedule E of the federal tax return. For newly acquired properties, rental agreements must be supplied and related debt verified. If additional income is needed for a borrower to qualify, a VA underwriter may factor in properly-documented rental property income.
Foreclosures can affect an application if they have occurred within the last three years. If the loan that was foreclosed upon was a VA loan, there may still be some unpaid loss to the VA in order for the borrower’s entitlement to be restored. The VA underwriter may reject a VA loan application showing a foreclosure history if the applicant has not restored entitlement or cannot show ability or willingness to pay current debts.
Many lenders require that a bankruptcy must have been discharged for at least two years, and the borrower’s credit must have been satisfactorily re-established during that time. For a Chapter 13, three-quarters of the payment plan must be completed and the Trustee or Bankruptcy Judge must approve of the mortgage loan. A copy of bankruptcy papers is often required.
Lack of or insufficient credit history can be tricky, but does not necessarily pose “the end of the line” for a VA loan applicant. A VA underwriter will look at other payments made by the borrower such as rent, utilities family loans and other factors to determine willingness and ability to pay debt.
The above situations describe the general guidelines of the VA Loan Guaranty Program. Lenders may have additional requirements. To learn more about VA underwriting, contact a VA loan professional.
