Written by Isaac F. Davis 

 

It’s common for VA-approved lenders to use VA underwriting software to “read” income and credit numbers in a VA loan application to determine whether a borrower qualifies.  In some circumstances a closer look from a manual underwriter (someone with special certification for determining VA loan qualification) is needed. 

 

When a VA loan applicant has special circumstances regarding his or her financials, then the VA home loan documents may need additional underwriting by a certified VA underwriter.  This means computer software may not be designed to recognize some of the unique situations people have. For example, some VA applicants have:

 

·    Bonus, overtime and second-job income

·    Self-employment income

·    Foreclosure history

·    Bankruptcy history

·    Expense accounts for travel

·    Employment instability – (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

·          Lack of or insufficient credit history

 

Occasionally, income from bonuses, overtime and second jobs may only be fully considered if it has been steady for two years or more, and if such future income can be validated by an employer.  It’s possible for this type of income to be considered by the VA underwriter in order to offset an applicant’s debt, even if it has been received for less than two years,

 

Self-employment income may be considered if the borrower can show a two year minimum history. Of course, the exception is if the borrower has specialized experience or training in the same line of work for another company. Under this scenario, the two-year minimum for self-employment income may be shortened to one year. However, less than one year is generally unacceptable. Self-employment income is defined under the VA guidelines as any revenue generated by ownership position of more than 10 percent. The VA loan applicant must be prepared to show two years of tax returns as well as year-to-date financial statements in order for VA underwriters to consider this type of income.

 

Foreclosures within the last three years can affect a VA loan application. If the loan that was foreclosed upon was a VA mortgage, then there may be some unpaid loss to the VA associated with that loan.  And, the borrower would have to repay the balance in order for full entitlement to be restored. The VA underwriter may reject a VA home loan application showing a foreclosure history if the applicant has not restored entitlement or cannot show ability or willingness to repay debts.

 

In the case bankruptcy, many lenders require that it must have been discharged for at least two years, and the veteran’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. The borrower should be prepared to produce a copy of the bankruptcy papers.

 

Expense income for things like hotel rooms, meals, airfare and car rentals are generally not considered by VA underwriters as income.   These usually offset costs incurred to employees for work-related travel and are not considered earnings. 

 

Notes receivable are something VA underwriters may consider as long as a copy of each note is presented by the borrower. Receipts of payment 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.

 

Child support and alimony income will require a copy of the divorce decree or separation agreement stamped by the court. Proof of receipt for the previous 12 months, and continuance of at least five more years is often required for VA underwriters to consider child support and alimony as viable income for VA loan qualification.

 

For rental property income to be by a VA underwriter, it must appear on an applicant’s Schedule E of the federal tax return. Depreciation of property may be added back to income. For newly acquired properties, rental agreements must be supplied and related debt verified. Vacancy and collection expenses from15 to 25 percent will be deducted from gross income. After computation, positive rental revenue will be added to income, and negative rent will be included as a long- term liability.

 

Lack of credit history can be tricky, but is not an impossible situation for a VA loan applicant.  A VA underwriter can look at other payment histories associated with the potential VA borrower such as rent, utilities and family loans to determine willingness and ability to pay debt.

 

The special qualifying circumstances described herein are only a general outline of the VA Loan Guaranty Program.  Lenders may have additional requirements.  To learn more about special VA underwriting circumstances, contact a VA loan specialist.