So what is the VA home loan underwriting process and guidelines? If you’ve ever looked into taking out a home loan, you’ve probably heard the term “underwriting.” What does underwriting mean for you and for your home? And how can you as the borrower affect its outcome? These are the questions we’ll tackle today in this article.
VA Underwriting Guidelines?
The VA home loan underwriting process is the longest and most intensive stage when it comes to mortgage lending. It’s the stage in which the real decisions are made: underwriters ultimately determine if you’re going to be approved for a loan or rejected. They look closely at your credit and assets to determine whether you are likely to pay back the loan; they make sure the originating loan officer packaged the file properly and that nothing is missing; and they’re also in charge of ensuring the property title is clean and that the loan meets all VA guidelines regarding income, VA loan credit requirements, debt, down payments, equity, and compensating factors. Essentially, underwriters are there to make sure you are a good investment for the lender to make and that all the rules are being followed. It’s especially important for VA lenders to follow the rules because the government guarantees a portion of all their loans. If you can make it past the underwriter, you’re pretty much home free.
The Three Typical Underwriting Outcomes
In general, there are three ways the underwriting process can go. First, your loan could be approved, but in need of tweaking. At this point, the lender will ask you for some more documents and see to smaller errors or clarifications on the file. Second, underwriters could clear your loan to close (CTC) immediately. This is rare, but it does happen. The third outcome, then, is rejection.
However, it’s more common for underwriters to offer a conditional approval instead of outright denying you the loan. We’ll explain what conditional approvals are a little later.
General Underwriting Requirements
Here’s a bare-bones list of what underwriters are looking for when they evaluate your loan file:
- Sufficient VA entitlement
- Eligible purpose behind the loan
- Occupancy requirements are met
- Low credit risk
- Steady income, able to repay the mortgage
- A residual income (the income left over after your debt payments are made) of 41 percent or higher
- A suitable debt-to-income ratio
- No judgment liens
- Verification of employment (VOE)
- No large or otherwise unusual bank deposits
- Clear CAIVRS numbers, meaning you have no outstanding government debt
- 12 months of punctual and complete payments (some lenders will allow 30 days delinquency)
The workflow of a VA loan looks like this:
First, your loan is originated by a loan officer. Loan officers establish the value of the home, order a home appraisal, obtain the needed title work, document your income, and acquire the proper disclosures from the VA, among other necessary items.
After this, your information is sent to a processor, who verifies it all and compiles it into your loan file. Your loan file contains nitty-gritty information, such as property details, the loan request, and your financial profile. Once the processor is done, the file then goes to the underwriter.
Underwriters must analyze your loan file based on the three C’s: Credit, Capacity, and Collateral. You must be a reasonably low credit risk, with a payment history that proves you can make payments on time and in full. You must have the capacity—such as the income, debt, reserves, and employment—to pay back the loan. And the third C, collateral, refers to the value of the home. If the underwriter is satisfied with your loan file in relation to the three C’s, you’ll likely be approved.
All in all, this process can take up to 60 days, given the number of underwriters available and how big or complex your file is. As cold and calculating as underwriters can seem, they really are on your side: they want to save everyone the pain of unwisely lending/buying a home. Their job is incredibly important to the success of both borrower and lender.
Manual vs. Automated Underwriting
Up until now, we’ve described the underwriting process as it is performed by human beings, but in our increasingly digital world, lots of underwriting duties have gone to computers. The Automated Underwriting System (AUS) is used by some lenders to approve or deny loan applications. AUS’s are usually flexible when evaluating your file. For instance, an AUS will be more forgiving when it comes to the age of your credit lines or your debt-to-income ratio (DTI). Manual underwriters will consider credit lines younger than 2 or 3 years to be a higher risk than those older than 2 or 3 years, while this wouldn’t phase an AUS. And while an AUS might approve a borrower with a DTI as high as 55 percent, underwriters themselves may stick to the conventional 41-45 percent maximum.
But sometimes the approval of a loan is more complicated than the numbers suggest. Sometimes an AUS will turn away a borrower who a manual underwriter would approve. In this case, lenders may order a manual underwrite of your file as a second opinion. Specific issues on your application, such as foreclosure or bankruptcy, benefit from human reasoning. And today, many lenders use a combination of manual and automatic underwriting to make sure borrowers are getting the fairest treatment.
If you’re ever denied a loan after only being evaluated by an AUS, request a manual underwrite from your lender. It may change things for you!
Earlier, we mentioned conditional approvals as one of the three outcomes of underwriting. Here’s what a conditional approval entails:
It’s often the case that before a final approval can be made on your loan, certain conditions will need to be met. All this means is that, for the most part, your loan is good to go, but there are a few little things that need to be addressed before you can close. So don’t panic if you get this response from an underwriter. Lots of borrowers get it; in fact, it’s very rare to just sail through the underwriting process with no hiccups at all.
Most of the time, conditional approvals have to do with documentation: either a certain document is missing, or the underwriter needs more proof of something mentioned in the file. Maybe the underwriter wants to see additional pay stubs or tax returns, or maybe they’ve already been ordered and you’re just waiting for them to arrive. If there are certain anomalies on your file, such as periods of extreme debt or extreme wealth, you’ll need to explain those thoroughly and assure the underwriter that you can be as predictable and consistent in your finances as possible. Borrowers usually make these sorts of explanations in the form of letters.
Underwriting and the Interest Rate Reduction Refinance Loan (IRRRL)
The Interest Rate Reduction Refinance Loan (IRRRL) or VA Streamline refinance loan is one of our favorite refinance options here at Low VA Rates. Why? Because it’s effective, fast, and easy. There’s little to no underwriting required when you take out an IRRRL, meaning no second home appraisal, no new Certificate of Eligibility, and no new credit underwriting package. Loan officers can just recycle the underwriting that was done on your file when you took out your original loan.
What Can You Do as the Borrower?
Even though it’s the underwriter who decides whether or not to approve your loan, you can still have a positive impact on the process by doing your very best as a borrower. Here are some tips for working with your loan officer and underwriter:
- Make sure all your forms are complete and valid! Turning in half-completed or ineligible documents will only delay the underwriting process and create headaches for everyone involved.
- Be honest! Don’t try to trick the underwriter. Remember, their job is to make sure you don’t take on a loan you won’t be able to handle.
- Submit documents in a timely manner. The sooner the underwriter can get to work on your file, the sooner you could be approved and potentially close on your home. Additionally, and perhaps more importantly, the sooner you turn in your documents, the sooner any errors can be found and dealt with. Some mistakes can push the process back weeks, so you want to get them addressed as early on as you can.
Preparing Veterans for Success
At Low VA Rates, we strongly believe in educating our borrowers instead of keeping them in the dark about things that are going to massively affect their financial futures. That’s why we write articles like this one: we want to bring you into the loop and make sure you have all the information necessary to make informed intelligent decisions. The VA loan process can be complex and overwhelming to the first or even second-time borrower, but our well-trained loan officers are ready and able to help you every step of the way. To learn more about the many processes and requirements that make up a VA loan, visit the rest of our website or give us a call at 866-569-8272. We thank you for your service!