KENTUCKY VA MORTGAGE LOANS

KENTUCKY VA MORTGAGE LOANS


KENTUCKY VA MORTGAGE LOANS

 

Credit guidelines on a Kentucky VA mortgage is more than a review of credit history. Unlike a conventional mortgage, a KY VA loan requirements put more emphasis on Residual Income (balance available for family support after debts) than Debt to Income Ratios. This page should shed some light on credit history and how it impacts your DTI and/or Residual Income.

Credit History
The applicant’s past repayment practices on obligations are the best indicator of his or her willingness to repay future obligations. Emphasis should be on the applicant’s overall payment patterns rather that isolated occurrences of unsatisfactory repayment.
Determine whether the applicant (and spouse, if applicable) is a satisfactory credit risk based on a careful analysis of the credit report and other credit data.
A poor credit history alone is a basis for disapproving a loan. If credit history is marginal, look to other indicators such as residual income.

Rent and Mortgage Payment History

The applicants rental history and any outstanding, assumed, or recently retired mortgages must be verified and rated. Housing expense payment history is often the best indicator of how motivated the applicant is to make timely mortgage payments in the future.

Rental payment history: Provide a 12 month rental history directly from landlord, through information shown on credit report or by cancelled checks.

Mortgage Payment History: Obtain direct verification when ratings are not available on mortgages that are outstanding, assumed, or recently retired.

A written explanation of mortgage payment history is required for borrowers with more than 1×30 day late payment for all mortgages for the past 12 months.

Account Balances: If a mortgage or other significant debt is listed on the credit report as past due and was last updated >90 days, verify current status of past due debt.

Derogatory credit information: Obtain explanation for derogatory credit. Explain assessment of creditworthiness on VA Form 26-6393, Loan Analysis.

Alimony and/or child support payments: Provide proof of deposits on bank statements for three months and … front page and details of support payments from the divorce decree, indicating evidence of at least three years continuance.

CAIVRS
“CAIVRS” is a “Credit Alert Interactive Voice Response System”. Basically what it does is check the applicant for Government obligations that are in default. I don’t think the system supports “voice” anymore so the acronym may change in the future.

Perform a CAIVRS screening on each applicant and any co-obligor immediately upon receipt of a loan application. This includes IRRRL applicants.

Applicant Presently Delinquent

Give full consideration to the CAIVRS information, and any subsequent clarifying information provided when applying VA credit standards.

Consider the terms of any repayment plan in analyzing monthly debt payments.
Consider any delinquencies in determining credit worthiness.
CAIVRS information is only for the lender’s and applicant’s use in process the loan application. Only those persons having responsibility for screening applicants and/or co-obligors may use CAIVRS.

If the CAIVRS screening indicates an applicant (or co-obligor) is presently delinquent or has had a foreclosure or a claim paid on a loan made, guaranteed or insured by a Federal agency, refer to VA for actions.

Spouses Credit
ECOA prohibits requests for, or consideration of, the credit of 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 spouses credit (whether or not the spouse will be personally liable on the note and whether or not the applicant and spouse choose to have the spouses income considered).

If a married veteran wants to obtain the loan in his or her name only, the veteran may do so without regard to the spouses credit only in a non-community property state.

Accounts in the Spouses Name: Under ECOA, upon the applicants request, the lender must consider any account reported in the name of the applicants spouse or former spouse that the applicant can demonstrate accurately reflects the applicants credit-worthiness.

Credit Report
Credit reports used in analyzing Kentucky Mortgage VA loans must be either a Three-file Merged Credit Reports (MCR), or a Residential Mortgage Credit Reports (RMCR). If an RMCR is used the standards applicable to an RMCR include, but are not limited to, the following:

The report must be prepared by a reputable credit-reporting agency.
Each account with a balance must have been checked with the creditor within 90 days of the date of the credit report.
For each debt listed, the report must provide the creditors name, date the account was opened, high credit, current status, required payment, unpaid balance, and payment history.
The report must name at least two national repositories of credit records contacted for each location in which the borrower has resided during the most recent two years.
Separate repository inquiries are required for any co-borrowers with individual credit records.
The report must include all available public records information that is not considered obsolete under the Fair Credit Reporting Act; such as bankruptcies, judgments, lawsuits, foreclosures and tax liens.
The RMCR must be an original report, with no erasures, white-outs, or alterations.
The report must contain a 24 month employment and residency history.
All inquiries made within the last 90 days must be included on the report.
VA may decline to accept a credit report which does not meet these standards.

Age of Reports: 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).

Additional verifications:

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 leave-and-earnings 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.

Bankruptcy
The fact that a bankruptcy exists in an applicants (or spouses) credit history does not in itself disqualify the loan. Develop complete information on the facts and circumstances of the bankruptcy. Consider the reasons for the bankruptcy and the type of bankruptcy filing.
Bankruptcy Filed Under the Straight Liquidation and Discharge Provisions of the Bankruptcy Law

You may disregard a bankruptcy discharged more than two years ago. However, if the bankruptcy was discharged within the last one to two years, it is probably not possible to determine that the applicant or spouse is a satisfactory credit risk unless both of the following requirements are met:

The applicant or spouse has obtained consumer items on credit subsequent to the bankruptcy and has satisfactorily made the payments over a continued period, and
The bankruptcy was caused by circumstances beyond the control of the applicant or spouse such as unemployment, prolonged strikes, medical bills not covered by insurance, and so on, and the circumstances are verified.
Divorce is not generally viewed as beyond the control of the borrower and/or spouse.

If the bankruptcy was caused by failure of the business of a self-employed applicant, it may be possible to determine that the applicant is a satisfactory credit risk if:

The applicant obtained a permanent position after the business failed.
There is no derogatory credit information prior to self-employment.
There is no derogatory credit information subsequent to the bankruptcy, and
Failure of the business was not due to the applicants misconduct.
If a borrower or spouse has been discharged in bankruptcy within the past 12 months, it will not generally be possible to determine that the borrower or spouse is a satisfactory credit risk.

Chapter 13
This type of filing indicates an effort to pay creditors. Regular payments are made to a court-appointed trustee over a two to three year period or, in some cases, up to five years, to pay off scaled down or entire debts.

If the applicant has finished making all payments satisfactorily, the lender may conclude that the applicant has reestablished satisfactory credit.

If the applicant has satisfactorily made at least 12 months worth of the payments and the Trustee or the Bankruptcy Judge approves of the new credit, the lender may give favorable consideration.

Foreclosure
The fact that a home loan foreclosure (or deed-in-lieu of foreclosure) exists in an applicants (or spouses) credit history does not in itself disqualify the loan.

Develop complete information on the facts and circumstances of the foreclosure. Apply the guidelines provided for bankruptcies filed under the straight liquidation and discharge provisions of the bankruptcy law.

If the foreclosure was on a VA loan, the applicant may not have full entitlement available for the new loan. Ensure that the applicants Certificate of Eligibility reflects sufficient entitlement to meet any secondary marketing requirements of the lender.

Judgments/Collection/Tax liens/Adverse credit

In circumstances not involving bankruptcy, satisfactory credit is generally considered to be reestablished after the veteran, or veteran and spouse, have made satisfactory payments for 12 months after the date of the last derogatory credit item.

If the applicant and/or spouse are determined satisfactory credit risks in spite of derogatory credit information, include an explanation of the basis for the determination.

For unpaid debts or debts that have not been paid timely, pay-off of these debts after the acceptability of applicants credit is questioned does not alter the unsatisfactory record of payment.

Lenders may consider a veterans claim of bona fide or legal defenses regarding unpaid debts except when the debt has been reduced to judgment.

Collection accounts do not necessarily have to be paid off as a condition for loan approval.

Account balances reduced to judgment by a court must either be paid in full or subject to a repayment plan with a history of timely payments.

Other Debts and Obligations

Job Related Expense: Include any costs for child care, significant commuting costs, and any other direct or incidental costs associated with the applicant’s (or spouse’s) employment.

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.

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.

Credit counseling
If a veteran, or veteran and spouse, have prior adverse credit and are participating in a Consumer Credit Counseling plan, they may be determined to be a satisfactory credit risk if they demonstrate 12 months satisfactory payments and the counseling agency approves the new credit.

If a veteran, or veteran and spouse, have good prior credit and are participating in a Consumer Credit Counseling plan, such participation is to be considered a neutral factor, or even a positive factor, in determining credit-worthiness.

Do not treat this as a negative credit item if the veteran entered the Consumer Credit Counseling plan before reaching the point of having bad credit.

Alternative credit
For obligations that have not been rated on the credit report or elsewhere, obtain the verification and rating directly from the creditor.

For applicants with no established credit history, base the determination on the applicants payment record on utilities, rent, automobile insurance, or other expenses that applicant has paid.

Absence of a credit history is not generally considered an adverse factor.

deducting debts from income

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 five 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 or may not have an impact on the applicants ability to provide for family living expense.

Contingent liabilities

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.

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 down payment 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 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.

Secondary financing
Secondary borrowing is acceptable as long as the veteran must not be placed in a substantially worse position than if the entire amount borrowed had been guaranteed by VA. and the requirements detailed below are met.

Documentation

The lender must submit documentation disclosing the source, amount, and repayment terms of the second mortgage and agreement to such terms by the veteran and any co-obligors.

Lien Position

The second mortgage must be subordinated to the VA guaranteed loan, that is, the second mortgage must be in a junior lien position relative to the VA loan.

Allowable Purposes

Proceeds of the second mortgage may be used for a variety of purposes, including but not limited to closing costs, or a down payment to meet secondary market requirements of the lender.

They may not be used to cover any portion of a down payment required by VA to cover the excess of the purchase price over VA’s reasonable value.

Cash Back

There can be no cash back to the veteran from the VA first mortgage or second mortgage obtained simultaneously.

The veteran must qualify for the second mortgage which is underwritten as an additional recurring monthly obligation.

Interest Rate

The rate on the second mortgage may exceed the rate on the VA-guaranteed first, however, it may not exceed industry standards for second mortgages. “Rule of thumb” is that second mortgages are one or two percent above the market interest rates for first mortgages.

Debts Owed to the Federal Government

An applicant cannot be considered a satisfactory credit risk if he or she is presently delinquent or in default on any debt to the Federal Government until the delinquent account has been brought current or satisfactory arrangements have been made between the applicant and the Federal agency. The refinancing of a delinquent VA loan with an IRRRL satisfies this requirement. An applicant cannot be considered a satisfactory credit risk if he or she has a judgment lien against his or her property for a debt owed to the Government until the judgment is paid or otherwise satisfied.

Debt Related to VA Benefits

Before processing a loan involving certain veterans, the lender must submit VA Form 26-8937, Verification of VA Benefit-Related Indebtedness, to the VA office where the loan application and/or closed loan package will be sent. VA will complete and return the form to the lender.

The loan cannot be submitted for prior approval or approved under the automatic procedure until the lender obtains the completed form from VA. The lender must submit the completed form with the loan package.

If the form indicates that the applicant receives non-service-connected pension or has been rated incompetent by VA, the loan cannot be closed automatically.
Submit the loan for prior approval.

If the form indicates that the applicant has any of the following:

An outstanding indebtedness of overpaid education, compensation or pension benefits.
An education or direct home loan in default.
An outstanding indebtedness resulting from payment of a claim on a prior guaranteed home loan.
A repayment plan for any of these debts that is not current,
then: one of the following must accompany the loan package: evidence of payment in full of the debt, or evidence of a current repayment plan acceptable to VA and evidence that the veteran executed a promissory note for the entire debt balance.

VA may find a repayment plan acceptable if the veteran has been satisfactorily making payments on a repayment plan in effect prior to the lenders inquiry.

The veterans overall credit history and anticipated financial capacity after the proposed loan is made indicate a reasonable likelihood that the repayment plan will be honored and the outstanding amount of indebtedness is not so large that it would prevent payment in full within a reasonable period (approximately one year), or

The case involves unusually meritorious circumstances. Example: Consideration would be given to a veteran with an outstanding credit history and adequate income whose debt balance is too large to be reasonably paid out in less than 18 months to two years.

VA will offer special consideration to a veterans claim that he or she was not previously aware of an overpayment of benefits

VA income guidelines use your income in two qualifying calculations: Residual Income and a Debt to Income Ratio.  Residual Income has more weight than DTI but both are major qualifying factors.  However, … first you must determine what your qualifying gross income is.  Naturally it can be complicated.  We hope this page will help you understand what is and is not qualifying income.

Acceptable Income: Only verified income can be considered in total effective income.

Unacceptable Income: Income from employment with less than 12 month term (with exceptions-see EMPLOYMENT HISTORY below)

Employment History

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 employers evaluation of the probability of continued employment, if provided, and
  • Whether the applicants training and/or education equipped him or her with particular skills that relate directly to the duties of his/her current position. Generally this 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 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 or employment will be terminated at some point in the future, which can be reasonably estimated, the lender may still consider the income of an applicant who 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 employers evaluation of the probability of continued employment, if provided.
  • The length of employment (for example, 10 months versus six months).

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.
  • Give favorable consideration to changes for the purpose of career advancement in the same or related field.
  • Favorable consideration my not be possible for changes with no apparent betterment to the applicant, and from one line of work to another.

If the lender includes applicants income in effective income, an explanation must accompany the loan submission.

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. 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.

Income from Commission

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

Verification of employment or other written verification which provides:

  • 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), plus
  • Individual income tax returns, signed and dated, plus all applicable schedules for the previous two years (or additional periods if needed to demonstrate a satisfactory earnings record).

Generally, income from commissions is considered stable when the applicant has obtained such income for at least two years.  Less than two years cannot usually be considered stable unless the applicant has had previous related employment and/or extensive specialized training.

Less than one year can rarely qualify. In-depth development is required for a conclusion of stable income on less than one year cases.

Non Military Employment

Verify a minimum of two years employment. If the applicant has been employed by the present employer less than two years verify prior employment plus present employment covering a total of two years.

Provide an explanation of why two years employment could not be verified.

Compare any different types of employment verifications obtained (such as, Verification of Employment, pay stubs, tax returns, and so on) for consistency, and clarify any substantial differences in the data that would have a bearing on the qualification of the applicant.

Acceptable Verification: 

  • VA Form 26-8497, Request for Verification of Employment (VOE) 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 the Department of Defense civilian employees to provide computer generated pay stubs accessed through myPay (formerly known as E/MSS-Employee Member Self Service).

Alternative Documentation:

Alternative documentation may be submitted in place of a VOE if the lender concludes that the applicants income is stable, reliable, and anticipated to continue during the foreseeable future; that is, if the applicants income qualifies as effective income. Two 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 two years, and
  • Telephone verification of the applicants current employment.

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 applicants 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.

Analysis:

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 applicants past employment record, applicants training, education, and qualifications for his/her position.

Two years employment in the applicants current position 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.

Active Military Income and Recent Discharge or Voluntary Separation

A military LES (Leave and Earnings Statement) is required instead of a VOE (VA Form 26-8497).  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 E/MSS) This type of LES is acceptable.

In addition, identify service members who are within 12 months of release from active duty or end of contract term. Find the date of expiration of the applicants current contract for active service on the LES (for an enlisted service member) or on an officers orders.

For a National Guard or Reserve member, find the expiration date of the applicants current contract.

Additional Requirements

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 service member 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 service member 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 service members commanding officer confirming that: the service member 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 down payment of at least 10 percent, significant cash reserves, and clear evidence of strong ties to the community coupled with a nonmilitary spouses income so high that only minimal income from the active duty service member is needed to qualify.

Reserves or National Guard Income

Income derived from service in the Reserves or National Guard may be included in effective income if the length of the applicants 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.

Recently Activated Reservist or Guard

Lenders must ask every applicant, whose income is being used to qualify for a loan, if their income is subject to change due to participation in a reserves/national guard unit due to activation.

To accomplish this, lenders must obtain a statement, which affirms that a veteran-applicant’s status relative to membership in the Reserves or National Guard, has been ascertained and considered. This statement should be made part of the origination package and should be submitted to VA in the event the loan is selected for full review.

When the answer is yes, 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 indication their tour of duty is not 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.

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. Weight 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.

 

Military Quarters Allowance

 

To use a military quarters allowance in the underwriting analysis, obtain DD Form 1747, Status of Housing Availability, indicating that item b (Permanent) or item d of that form applies. This form serves as notice that Quarters will not be made available to the applicant, and the applicant is authorized to make permanent arrangements for nonmilitary housing.

Note: DD Form 1747 is not required in either of the following circumstances:

  • When the applicants duty assignment clearly qualifies the applicant for quarters allowance. Examples include personnel stationed overseas whose families remain stateside, recruiters on detached duty, and military personnel stationed in areas where no on-base housing exists.
  • When VA has established that the waiting lists for on-base housing in a particular geographic area are so long that it is improbable that individuals desiring to purchase off-base housing would be precluded from doing so in the foreseeable future.
  • When VA issues a release to all lenders in the jurisdiction to inform them of its determination.

Include an explanation with the loan submission of the circumstances justifying omission of the form.

Analysis: 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.

Subsistence and Clothing Allowances

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

Analysis: 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.

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:  Examples include pro-pay, 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 recipients 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.

Recently Discharged Veterans

Income: Obtain verification of any of the following that apply:

  • Employment income.
  • 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: 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.

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 applicants 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 applicants 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.

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

Non-qualifying 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.

Voluntary Separation Payments

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

  • Special Separation Benefit (SSB). A one-time lump sum. Taxable in the year received. Treat the same as any substantial cash reserve, and
  • Voluntary Separation Incentive (VSI). Annual payments. Taxable in the year received. Include in effective income. Calculated by multiplying the veterans years of service times two. Requires a minimum of six 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.

Base Pay Analysis:

Consider the applicants 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 re-enlisting, determine whether: the applicants anticipated source of income is stable and reliable, and/or unusually strong underwriting factors compensate for any unknowns regarding future sources of income.

Grossing Up Fixed Income

Tax-free income may be “grossed up” for purposes of calculating the debt-to-income ratio only (not residual income). This is a tool that may be used to lower the debt ratio for veterans who clearly qualify for the loan.

“Grossing up” involves adjusting the income upward to a pre-tax or gross income amount which, after deducting state and Federal income taxes, equals the tax-exempt income.

Use current income tax withholding tables to determine an amount which can be prudently employed to adjust the borrower’s actual income. Do not add non-taxable income to taxable income before “grossing up.”

Tax-free income includes certain military allowances, child support payments, workers’ compensation benefits, disability retirement payments and certain types of public assistance payments. Verify that the income is indeed tax-free before “grossing up.”

Income of a Spouse

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 the Equal Credit Opportunity Act (ECOA).

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

Verify and treat the income of a spouse who will be contractually obligated on the loan the same as the veterans income.

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

  • Spouse will be contractually liable.
  • Applicant is relying on the spouses 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.

Trailing Spouse income is Not allowed

Rental Income for Multi-Unit Property Securing the VA Loan

Verification: Cash reserves totaling at least 6 months mortgage payments (principal, interest, taxes, and insurance – PITI), and Documentation of the applicants prior experience managing rental units or other background involving both property maintenance and rental.

Analysis: 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 six 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 appraisers opinion of the property’s fair monthly rental (proposed construction).

Note: A percentage greater than 75% may be used if the basis for such percentage is adequately documented.

Rental Income of the Property Applicant Occupied Prior to the New Loan

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

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.

Rental Income of Other Property Not Securing the VA Loan

Documentation of cash reserves totaling at least three 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 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 applicants 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.

Alimony/Child Support

Must comply with ECOA. 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.

Non-Traditional 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 three years or more.

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

Seasonal Income

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

Foster Care

The lender may include verified income received specifically for the care of any foster child(ren.)  Generally, however, 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.

Workman’s Comp

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

Automobile or Similar Allowances

Generally, automobile allowances are paid to cover specific expenses related to an applicants 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.

Income Tax and Social Security Deductions

Determine the appropriate deductions for Federal income tax and Social Security using the Employers 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 applicants potential tax benefits from obtaining the loan (for example, mortgage interest deduction) in the analysis. To do so, Determine what the applicants withholding allowances will be, using the instructions and worksheet portion of IRS Form W-4, Employees Withholding Allowance Certificate, and apply that withholding number when calculating Federal and state income tax deductions.

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 borrowers 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%, there is an annual limit on the tax credit equal to the lesser of $2,000 or the borrowers 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.

Borrowers estimated total Federal income tax liability is $9,000.

Calculate the tax credit as follows:

  • 30% 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.

Note: No promissory note is required in cases referred to the Department of Justice, General Accounting Office, or VA Regional Counsel for judicial enforcement. In such cases, VA will obtain information on the applicants debt status from these parties and relay pertinent information to the lender.

Debt-to-Income Ratio

VA’s debt-to-income ratio is a guide and, as an underwriting factor, it is secondary to the residual income. It should not automatically trigger approval or rejection of a loan. Instead consider the ratio in conjunction with all other credit factors.  This page goes into great detail of those factors.

VA only uses a Back Ratio of 41% for qualifying.  To calculate this ratio add up the following monthly expenses and then divide that total by the gross monthly income.

  • New monthly housing payment (PITI)
  • Monthly installment payments that extend beyond 9 months.
  • Minimum Monthly payments on revolving charge cards
  • Monthly child support or alimony
  • Nursery care/child care

A ratio greater than 41% requires close scrutiny unless the ratio is greater than 41% solely due to the existence of tax-free income , or residual income exceeds the guideline by at least 20%.

Compensating Factors

Compensating factors may affect the loan decision. These factors are especially important when reviewing loans which are marginal with respect to residual income or debt-to-income ratio. They cannot be used to compensate for unsatisfactory credit.

Valid compensating factors should represent unusual strengths rather than mere satisfaction of basic program requirements. For example: Significant liquid assets may compensate for a residual income shortfall whereas long-term employment would not.

Compensating factors include, but are not limited to the following:

  • Excellent credit history.
  • Conservative use of consumer credit.
  • Minimal consumer debt.
  • Long-term employment.
  • Significant liquid assets.
  • Sizable down payment.
  • The existence of equity in refinancing loans.
  • Little or no increase in shelter expense. (payment shock)
  • Military benefits.
  • Satisfactory home ownership experience.
  • High residual income.
  • Low debt-to-income ratio.
  • Tax credits for child care, and
  • Tax benefits of home ownership.

Payment Shock

Closely scrutinize a case in which the applicant will be paying significantly higher shelter expenses than he or she currently pays. Consider the ability of the applicant and spouse to accumulate liquid assets; such as: Cash and Bonds, and the amount of debts incurred while paying a lesser amount for shelter.

If an application shows little or no capital reserves and excessive obligations, it may not be reasonable to conclude that a substantial increase in shelter expenses can be absorbed.

Divorce

The payment amount on any alimony and/or child support obligation of the applicant must be verified.  Do not request documentation of an applicants 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.

Alternative Credit

For obligations that have not been rated on the credit report or elsewhere, obtain the verification and rating directly from the creditor.

For applicants with no established credit history, base the determination on the applicants payment record on utilities, rent, automobile insurance, or other expenses that applicant has paid.

Absence of a credit history is not generally considered an adverse factor.

Deducting Debts from Income

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 five 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 or may not have an impact on the applicants ability to provide for family living expense.

Contingent liabilities

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.

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 down payment 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 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.

Debts Owed to the Federal Government

An applicant cannot be considered a satisfactory credit risk if he or she is presently delinquent or in default on any debt to the Federal Government until the delinquent account has been brought current or satisfactory arrangements have been made between the applicant and the Federal agency. The refinancing of a delinquent VA loan with an IRRRL satisfies this requirement. An applicant cannot be considered a satisfactory credit risk if he or she has a judgment lien against his or her property for a debt owed to the Government until the judgment is paid or otherwise satisfied.

Debt Related to VA Benefits

Before processing a loan involving certain veterans,  the lender must submit VA Form 26-8937, Verification of VA Benefit-Related Indebtedness, to the VA office where the loan application and/or closed loan package will be sent.  VA will complete and return the form to the lender.

The loan cannot be submitted for prior approval or approved under the automatic procedure until the lender obtains the completed form from VA. The lender must submit the completed form with the loan package.

If the form indicates that the applicant receives non-service-connected pension or has been rated incompetent by VA, the loan cannot be closed automatically.
Submit the loan for prior approval.

If the form indicates that the applicant has any of the following:

  • An outstanding indebtedness of overpaid education, compensation or pension benefits.
  • An education or direct home loan in default.
  • An outstanding indebtedness resulting from payment of a claim on a prior guaranteed home loan.
  • A repayment plan for any of these debts that is not current,

then: one of the following must accompany the loan package: evidence of payment in full of the debt, or evidence of a current repayment plan acceptable to VA and evidence that the veteran executed a promissory note for the entire debt balance.

VA may find a repayment plan acceptable if the veteran has been satisfactorily making payments on a repayment plan in effect prior to the lenders inquiry.

The veterans overall credit history and anticipated financial capacity after the proposed loan is made indicate a reasonable likelihood that the repayment plan will be honored and the outstanding amount of indebtedness is not so large that it would prevent payment in full within a reasonable period (approximately one year), or

The case involves unusually meritorious circumstances.  Example: Consideration would be given to a veteran with an outstanding credit history and adequate income whose debt balance is too large to be reasonably paid out in less than 18 months to two years.

VA will offer special consideration to a veterans claim that he or she was not previously aware of an overpayment of benefits

 

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