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.


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