Manual Underwriting on a VA Loan

Minneapolis, MN: I LOVE VA LOANS! But a common misunderstanding is that a VA loan is automatic for Veterans. I wish that were true, but the reality is VA Loans, just like any other mortgage loan has qualifying guidelines. Just like other loans, some people easily qualify, and some are rough around the edges in need of an expert to massage the file to loan approval.

Here I will explain how computerized underwriting approval versus manual underwriting works on VA loans.

VA LOAN INITIAL APPROVAL PROCESS

After taking your application, we pull credit, and run your application though the appropriate computer system for initial loan approval. Lenders essentially get two answers back for the AUS (Automated Underwriting System), either Approved, or Refer. These are known as “findings.”

VA Loans MN, WI, SD

APPROVED

An “Approved/Eligible” finding means the computer accepts the data, and as long as things match, the loan should be fine. For example we told the computer you make $50,000 a year. As long as pay stubs and W2’s match up and say the same thing, you should be fine.

REFER

A ‘REFER’ finding response is not an automatic no, or that your application is dead. It means the computer doesn’t like something within your application profile, and we should REFER it to an underwriter for old school manual underwriting approval.

DIFFERENCES BETWEEN APPROVE AND REFER

Another way to look at the two is that Approved is easier, more forgiving (especially in debt-to-income ratio’s), and needs less documentation. Refer on the other hand is more stringent, has tighter debt-to-income ratio’s, and requires a lot more documentation.

Getting A REFER Approved

When looking to approve a Refer, underwriters have to make sense of the over file. Questions generally revolve around the reason for the Refer, and do you have compensating factors that help strengthen your file to offset the Refer.

A Refer is very common when you have low credit scores (under 620), or a lot of negative credit information, including collections, judgments, and major negative items like a foreclosure or bankruptcy. Underwriting is look with a microscope over your credit report. Why do you have a low score, how recent and severe are the negative events, and is there a logical reason outside of your control for the events.

They are also looking for current compensating factors that improve your loan. For example:

  • A lot of money still in the bank after closing. At least 3 months of payments
  • Longevity at the job. A stable job history versus multiple short term jobs
  • Little or no payment shock – Is the new house payment less than you’ve been paying in rent, or no more than 5% higher than you are paying in rent.

VA LOAN DEBT TO INCOME RATIOS

When getting any home loan, lenders look at two debt-to-income ratio numbers, commonly referred to as front and back ratio’s. You will usually see them express as something like 29/43.

Your front ration is a percentage of your income used solely for the new house payment, and nothing more.

Your back ratio, and the one more common to home buyers takes the new house payment, plus things like car loans, student loans, and minimum payments on credit cards. It does not usually include things not on a credit report, like cell phone bills, car insurance, or utilities (gas and electric).

As an example, lets us assume your pre-tax income is $5,000 a month. Your new home payment, including taxes and insurance is $1,500 a month. That is just about a 20% housing ratio (front end).

Let us assume your card payments, student loans, boat payment, and minimum credit card payments equal $1,000 a month. That would mean your back ratio (house plus debt) is 39%.

The two combined would be represented as 20/39.

As mentioned earlier, Refer files come with stricter debt-to-income ratio’s. VA, like all other programs have generalized guidelines. If you fall below the debt ratio guidelines, approvals are likely.

As you creep outside those guidelines, approvals become harder. It is very difficult to say a specific ratio is approved, and a specific ratio is denied.

But as a rule, the higher your front ratio goes about 30%, and the higher your back ratio goes above 41%, the more difficult approvals get.

I have seen many computer ACCEPT loans get approved with a 55% back ratio, but rare do you see a REFER back ratio above 45% get approved.

The bottom line

A Refer from the underwriting computer is not an automatic kiss of death.

Not all lenders approve REFER loans. Some automatically reject them, many do not. If your VA loan got a Refer, but the lender doesn’t offer Refer options, by all means, try again with another VA lender who does (like me!).

On the other hand, if your REFER file was underwriter reviewed, and still got denied, I do NOT suggest you keep trying. Rather, fix whatever this issue was, and try again in the future.

Ask the VA Mortgage Expert

If you are buying a home in MN, WI, or SD, reach out to me for your VA at (651) 552-3681. Better yes, just get started by completing our VA Application at VAMortgageMN.com.

After a brief conversation we will discuss your qualifications and send you an application link. We are experts in VA loans, including manually underwriting VA loans with higher debt to income ratios.

Equal housing lender. Not everyone will qualify. NMLS 274132. Not an offer to enter into an interest rate loack agreement.


When can you cancel mortgage insurance?

Minneapolis, MN:  Mortgage insurance? Everyone asks when can you cancel mortgage insurance?

The answer can vary greatly bepending on loan program chosen, the down payment size, and market conditions. Understanding the basic’s goes a long way in helping make a loan and down payment decision.

For standard conventional mortgage loans with monthly mortgage insurance:

  If you do notthing special but make your payments:

  • About 110 monthy with 5% down
  • About 89 months with 10% down
  • About 56 months with 15% down

You can ask the lender to remove monthly mortgage insurance earlier if  with the combination of paying down the loan, and home appreciation, you believe the amount you owe on the home is now less than 80% of it’s value.

For FHA Loans

For FHA loans with LESS than 10% down

  • Life of loan (never goes away unless you refinance)

For an FHA loan with 10% down or more

  • Exactly 132 months
  • You can NOT remove earlier even if you fall below 80% loan-to-value

For VA Loans

  • No mortgage insurance

For USDA Loans

  • Life of loan. Never goes away
Cancel Mortgage insurance and save

Other Mortgage Insurance Options

We all want to save some money, so understand that with standard conventional loans, you can also ‘buy out’ of monthly mortgage insurance that may save money in the loan run.  There are two ways to do this:

Lender paid mortgage insurance – This is where your lender increases the loans insterest rate to pay for the mortgage insurance in lieu of you paying it monthly. There are a ton of variables in this option to determine if it makes sense, and is not automatically good or bad.

Borrower paid mortgage insurance – This is where you pay an extra lump sum at closing to buy out of monthly mortgage insurance. Generally the cost is about equal to 40 payments of monthly mortgage insurance, and can really add up. As with lender paid mortgage insurance, there are many varibles to determine if this options makes sense.

You can potentially do the old two loan option to avoid mortgage insurance. For example you get a standard loan at 80%, and a second mortgage at 10% (total = 90% financing). I’m not a gigantic fan of this option in most cases because when you do this, generally the first mortgage insterest rate is .125% higher because your risk level is still 90%. Next, most home equity loans are varible rates, with minimum payments of interest only.  I’ve seen many people take this option, then make small interest only payments.  10-years from now, they still owe the full amount, leaving themselves in worse position than if they had taken standard mortgage insurance.

How PMI has Changed

Finally, standard monthly mortgage insurance is very different today than just a few years ago.  For most people, it is a lot cheaper.

All the mortgage insurance companies have switched over to risk based pricing.  A 5% down loan needs to cover your risk 15% (to 80% loan-to-value), and is therefore more expensive that a 15% down loan, which only needs to cover your risk 5% (to 80% loan to value).

Next, credit scores matter too. Someone with excellent credit will pay significantly less in mortgage insurance than someone with weaker credit score.

One other factor is how many borrowers. Generally speaking, two well qualified people buying a home are less risk than just one person, so mortgage insurance even fators than to determine the cost. The simply reason being if there are two borrowers, and one has a job loss, they have less risk of default than just one borrower who has a job loss.

In the end, a good Loan Officer will also have, as part of your loan review, a conversation about mortgage insurance options with you. If they didn’t, call someone else!

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I lend in MN, WI, and SD and would love to be your lender. 

To apply directly with me, and find out what type of loan and mortgage insurance is right for you, just go to iJoeMetzler.com or call me at (651) 552-3681. NMLS274132. Equal Housing Lender

Call Joe Metzler, iMortgageJoe.com