- Credit Requirements
- Debt To Income Ratio
- VA Residual Income
- Documents Required
- Manual vs Automated Underwriting
Credit Requirements
One of the greatest benefits of the VA Loan is that the Department of Veterans Affairs doesn’t have any credit requirements. Without a requirement set by the government, lenders are able to be much more flexible and often accept lower credit ratings than traditional mortgage products. While the VA doesn’t have a minimum required score they do have requirements that revolve around a veterans creditworthiness. These requirements primarily focus on a veterans most recent 12 to 24 months of payment history.
If a veteran can show that they have no late payments on their credit report in the last 12 months and can prove 24 months of on time housing payments (rent or mortgage) they generally will be eligible to purchase a home using their VA home loan benefit.
VA Loans for Veterans with Damaged Credit
At MHS Lending, not only are our credit requirements much more flexible for VA Loans than other loan products, but we also offer VA Loans for veterans with damaged credit. Damaged credit VA loans are designed to offer second chances for veterans and active service members who have credit or debt-to-income ratio issues. Because we have no lender overlays, we are able to help clients who normally have a difficult time getting a VA Loan. Many of our clients tell us that we were the only company that could get them approved to buy a house. In the past, we’ve even been able to help clients with sub 500 credit scores use their hard earned VA home loan benefit.
With some of the best interest rates available on the market and a relaxed credit score requirement, VA Loans can be a powerful tool for military families who are looking to buy a new home.
Debt To Income Ratio
In addition to no credit score requirements, lenders who issue VA Loans are able to offer more flexibility when it comes to debt-to-income (DTI) ratio requirements. DTI is the percentage of your gross monthly income that goes towards making monthly debt payments. Essentially, lenders and underwriters will compare how much you owe every month to how much money you earn.
Even though the VA does not have a mandate when it comes to a maximum DTI ratio, there are some guidelines that most lenders follow where borrowers are encouraged to have a DTI ratio below 41%. MHS Lending, like the VA itself, does not have any DTI ratio requirements. Most lenders will be more critical of VA loans with a DTI above 41%. MHS Lending believes this can put unnecessary stress on a veteran and his or her family when home shopping and doesn’t account for other income in the household that can’t be used to qualify.
Calculating Your DTI
If you’re interested in calculating your own DTI, there’s a simple equation to help you do so. First, total all of your monthly expenses that would be on your credit report including car payments, student loans, and child care expenses. Then add that to your proposed monthly housing payment to get a total monthly debt number. Next, add up all your monthly income including steady (2+ year history) self employment income and divide that total by your total monthly debt to get your DTI.
Keep in mind that not everything will be factored into your monthly income or monthly debts. For example, if you have other income like self-employment income or overtime, you’ll likely need to provide at least a two-year history for that to qualify. Additionally, most lenders will not count cell phone bills, insurance bills, household items, and groceries as part of your monthly debts.
Example DTI Ratio Calculation
|
Monthly Debts |
|
|---|---|
|
Proposed housing payment |
$2,000 |
|
Car payment |
$500 |
|
Student loan |
$350 |
|
Credit card minimum |
$150 |
|
TOTAL |
$3,000 |
|
Monthly Income (pre-tax) |
|
|
Full-time job ($60,000 / year) |
$5,000 |
|
TOTAL |
$5,000 |
|
DTI = Debts / Income |
|
|
$3,000 / $5,000 60% |
|
*if you are working with another lender, they may tell you that they can’t help you because 60% is too high for them, but because we don’t have any lender overlays at MHS Lending, you would likely still be approved with us*
VA Residual Income
VA residual income is one of the main components the Department of Veterans Affairs cares about in the loan process. Residual income is the income after all debts and major recurring expenses are taken into account including but not limited to credit card bills, income tax, utility bills, etc. In order for the VA to insure the loan, the veteran or service member must meet the residual income requirements.
There are a few important factors that go into determining someone's residual income and the amount varies by each circumstance. This includes the size of the loan, the number of people who would live in the home, and where the borrower is looking to buy. Since different parts of the country vary drastically in how much things cost, the below residual income chart is used by VA-approved lenders to determine which veterans qualify for a VA loan of a particular size.
VA Residual Income Charts
|
VA Residual Income for Loan Amounts of $79,999 and below |
||||
|---|---|---|---|---|
|
Family Size |
Northeast |
Midwest |
South |
West |
|
1 |
$390 |
$382 |
$382 |
$425 |
|
2 |
$654 |
$641 |
$641 |
$713 |
|
3 |
$788 |
$772 |
$772 |
$859 |
|
4 |
$888 |
$868 |
$868 |
$967 |
|
5 |
$921 |
$902 |
$902 |
$1,004 |
|
5+ |
+$75 for each additional family member (up to a family of seven) |
|||
|
VA Residual Income for Loan Amounts of $80,000 and above |
||||
|
Family Size |
Northeast |
Midwest |
South |
West |
|
1 |
$450 |
$441 |
$441 |
$491 |
|
2 |
$755 |
$738 |
$738 |
$823 |
|
3 |
$909 |
$889 |
$889 |
$990 |
|
4 |
$1,025 |
$1,003 |
$1,003 |
$1,117 |
|
5 |
$1,062 |
$1,039 |
$1,039 |
$1,158 |
|
5+ |
+$80 for each additional family member (up to a family of seven) |
|||
VA Residual Income Region Break Down
|
Geographic Region |
States |
|---|---|
|
Northeast |
Connecticut, Maine, Massachusetts New Hampshire, New Jersey, New York, Pennsylvania, Rhode, Island, Vermont |
|
Midwest |
Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, Wisconsin |
|
South |
Alabama, Arkansas, Delaware, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, Oklahoma, Puerto Rico, South Carolina, Tennessee, Texas, Virginia, Washington DC, West Virginia |
|
West |
Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington, Wyoming |
Lenders are expected to count all members of the household who are considered dependents of the borrower when determining the family size. If a borrower is an active duty service member that is buying a home within close proximity to a military installation the residual income may be reduced by five percent due to their access to less expensive, tax-free goods.
Example Residual Income Calculation
|
Monthly Income (pre-tax) |
|
|---|---|
|
Full-time job |
$6,000 |
|
Self-Employment *with proven 2-year history* |
$800 |
|
TOTAL |
$6,800 |
|
Monthly Debts |
|
|
Proposed housing payment |
-$1,250 |
|
Car payment |
-$200 |
|
Student loan |
-$250 |
|
Child care |
-$800 |
|
Estimated utility costs |
-$210 |
|
Average credit card bills |
-$450 |
|
Income tax and other deductions on paystub |
-$650 |
|
TOTAL |
$3,810 |
|
Residual Income = Income - Debts |
|
|
$6,800 - $3,160 $2,990 |
|
Most of these monthly debts can be determined by credit reports and bank statements and an easy way to calculate estimated utility costs is to multiply the square footage of your home by 14%. For example, if you have a 1,500-square-foot home, your monthly utility costs would be $210 (1,500 x 0.14)
Along with having a residual requirement, lenders also have to increase that requirement by 20% if the borrower’s DTI ratio is above 41%.
Documents Required
After you get pre-approved and have found your dream home, it’s time to finalize the loan and that’s when the official underwriting process begins. Your lender will request specific documents like pay stubs and bank statements for the underwriter to review. All documents will be combed through so they can determine whether your loan is approved, denied, or has conditional approval. Here is a list of documents you can expect your lender to pull and why they are needed:
- Credit report to ensure you have a good credit score and there are no red flags on past credit like bankruptcy or other financial issues.
- Employment verification to show how much income you are making now in addition to any anticipated additional income as laid out in employment agreements. Documents to help with this include:
- W-2’s from the last two years.
- Pay stubs from the last 30-60 days prior to applying.
- Account information including statements from all bank accounts such as checking, savings, and retirement accounts.
- Any additional income or liability documentation like dividends, overtime, pension, child support, etc.
- Certificate of Eligibility (also known as COE) in order to identify a few critical factors specific to you as a veteran or service member. First, the amount of available entitlement for the veteran or military member is determined, then the status of exempt/non-exempt from the funding fee is confirmed and finally the amount of VA monthly service-connected disability compensation is checked.
Once all of these documents are checked and approved, your loan officer will issue a “pre-approval” which means you are ready to go to the next stage of the homebuying process, home shopping!
Manual vs Automated Underwriting
Underwriting is the process through which a lender or bank takes on the financial risk of a loan for a fee. Underwriters are tasked with assessing the degree of risk that lender or bank will face with the loan so they can set fair and reasonable terms. Once a loan has been underwritten successfully it can then be approved and finalized and the home buying journey can come to a close.
There are a few different types of underwriting with the most common being manual and automated underwriting. The main difference between the two is that manual underwriting requires an underwriter to review the application more in depth. Manual underwrites generally mean that the automated underwriting software (AUS) was unable to determine an acceptable risk threshold. Therefore the underwriter has more discretion to approve or deny a loan based on the provided documentation.
Visually show the difference between automated and manual either side by side with clipart of a computer and of a person, or in another way to show how one is done by a person and one is not.
Automated underwriting
Automated underwriting is the more technologically advanced of the two processes and is completed through software provided to lenders by the large Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac. This software scans through the veterans loan application and determines risk for major portions of the loan application like credit, income, assets, and the subject property. Since this process is more hands off, it is typically a much quicker process than manual underwriting. For automated underwriting to be achieved, it is generally understood that the veteran is in a good financial situation and has acceptable credit history.
Manual underwriting
For times when a software or program can’t understand the full scope of a borrower's personal situation including borrowers who have had credit troubles in the past or don’t have a lot of credit history, manual underwriting may be necessary. Manual underwriting is the process of having an application reviewed and analyzed by an actual human being. This process requires more documentation and can therefore take more time, but for the right situation it can drastically improve a borrower’s chances of being approved for a loan. Having your file manually underwritten is not a bad thing, in fact it is one of the main reasons why MHS Lending is able to approve our clients more often and for more money than our competitors!
Anticipated underwriting timeline
Since underwriters are thorough in their research, the process typically takes a few weeks. This can be extended if the loan needs to be manually underwritten rather than done so by a software or program. Because of the extra paperwork involved in manual underwriting, the process may take a few additional weeks. A good rule of thumb for borrowers to keep in mind is that the faster they submit all necessary documents, the faster the underwriting process moves.