Loan Info

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Change Date

• This section has been updated to correct hyperlinks and to make minor grammatical edits.

a. VA Underwriting Standards

VA’s underwriting standards are intended to provide guidelines for lenders’ underwriters as well as VA’s underwriters.  Underwriting decisions must be based on sound application of the underwriting standards, and underwriters are expected to use good judgment and flexibility in applying the guidelines set forth in the following pages.

b. Basic Requirements

• is a satisfactory credit risk, and
• has present and anticipated income that bears a proper relation to the contemplated terms of repayment.

VA’s underwriting standards are incorporated into VA regulations at 38 CFR 36.4337 and explained in this chapter.  This chapter addresses the verifications, procedures, and analysis involved in underwriting a VA-guaranteed loan.  It provides guidance on how to treat income, debts and obligations, credit history, and so on, and how to present and analyze these items on VA’s loan analysis form.  It does not deal with every possible circumstance that will arise; therefore, underwriters must apply reasonable judgment and flexibility in administering this important veteran’s benefit.

c. Lender Responsibility

• developing all credit information,
• properly obtaining all required verifications and the credit report,
• ensuring the accuracy of all information on which the loan decision is based,
• complying with the law and regulations governing VA’s underwriting standards, and with VA’s underwriting policies, procedures, and guidelines, and
• certifying as to compliance with all of the above.

d. Lender Procedures

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The applicant’s authorization can be obtained for each verification needed, or on one blanket authorization form (attach a copy of the blanket authorization to each verification requested, including VA Form 26-8937, Verification of VA Benefits, if applicable).

The credit report and verifications can be ordered by the lender or its agent or a party designated by the lender to perform that function.  However, these documents must always be delivered by the credit reporting agency or verifying party directly to the lender or its agent, and never to another party.  That is, while a lender may delegate authority for a builder, realtor, or other person to order the report for the lender, the report may not be delivered to such builder, realtor, and so on, and may not pass through the hands of any such party or the applicant.

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The form is not required for Interest Rate Reduction Refinancing Loans (except IRRRLs to refinance delinquent VA loans).

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The underwriter must certify review and approval of the loan by signing item 51 of the Loan Analysis (for Automated Underwriting cases, see section 8 of this chapter).

Note: For nonsupervised automatic lenders, line 51 signature must be a VA-approved underwriter.

Prior approval loans

The individual with authority to determine that the loan meets VA credit standards and should be submitted to VA, must sign item 51 of the Loan Analysis. 

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e. Underwriting Special Types of Loans

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f. Refinancing Loans

IRRRLs made to refinance VA loans 30 days or more past due must be submitted to VA for prior approval.  It must be reasonable to conclude that:

• the circumstances that caused the delinquency have been corrected, and
• the veteran can successfully maintain the new loan.

Reference:  See chapter 6 for details on all types of refinancing loans.

Change Date

• This section has been updated to correct hyperlinks and to make minor grammatical edits.
• Subsection m has been updated by removing the requirement that lenders must obtain a statement regarding a person’s membership in the Reserves or National Guard.

a. Underwriter’s Objectives

• the mortgage payment,
• other shelter expenses,
• debts and obligations, and
• family living expenses.

Evaluate whether verified income is:

• stable and reliable,
• anticipated to continue during the foreseeable future, and
• sufficient in amount.

b. Importance of Verification

c. Income of a Spouse

To ensure compliance with the Equal Credit Opportunity Act (ECOA), do not ask questions about the income of an applicant’s spouse unless the:

• spouse will be contractually liable,
• applicant is relying on the spouse’s income to qualify,
• applicant is relying on alimony, child support, or separate maintenance payments from the spouse or former spouse, or
• applicant resides in a community property State or the security is in such a State.

Note:  In community property States, information concerning a spouse may be requested and considered in the same manner as for the applicant, even if the spouse will not be contractually obligated on the loan.

d. ECOA Considerations

Always inform the applicant (and spouse, if applicable) that they do not have to divulge information on the receipt of child support, alimony, or separate maintenance.  However, in order for this income to be considered in the loan analysis, it must be divulged and verified.

Income cannot be discounted because of sex, marital status, age, race, or other prohibited bases under ECOA.

Treat income from all sources equally; that is, the fact that all or part of an applicant’s income is derived from any public assistance program is not treated as a negative factor, provided the income is stable and reliable.

e. Income from Non-Military Employment

Verify a minimum of 2 years employment.

If the applicant has been employed by the present employer less than 2 years:

• verify prior employment plus present employment covering a total of 2 years,
• provide an explanation of why 2 years employment could not be verified,
• compare any different types of employment verifications obtained (such as, Verification of Employment (VOE), pay stubs, and tax returns for consistency), and
• clarify any substantial differences in the data that would have a bearing on the qualification of the applicant.

Verification:  Employment Verification Services

Lenders may use VOEs supplied by an employment verification service only if VA has approved the use of VOEs from that particular provider.  VA has approved “FULL” verifications of employment through “The Work Number for Everyone,” a service of the TALX Corporation.  (No pay stub is needed with the TALX verification.)

e. Income from Non-Military Employment (continued)

Acceptable verification consists of:

• VA Form 26-8497, Request for Verification of Employment, or any format which furnishes the same information as VA Form 26-8497, plus
• a pay stub if the employer normally provides one to the applicant.

If the employer does not indicate the probability of continued employment on the VOE, the lender is not required to request anything additional on that subject.

The VOE and pay stub must be no more than 120 days old (180 days for new construction).

• For loans closed automatically, the date of the VOE and pay stub must be within 120 days of the date the note is signed (180 days for new construction).
• For prior approval loans, the date of the VOE and pay stub must be within 120 days of the date the application is received by VA (180 days for new construction).

The VOE must be an original.  The pay stub may be an original or a copy certified by the lender to be a true copy of the original.

Note:  It is acceptable for Department of Defense civilian employees to provide computer generated pay stubs accessed through myPay (formerly known as E/MSS – Employee Member Self Service).

Verification:  Additional Documentation for Persons Employed in the Building Trades or Other Seasonal or Climate-Dependent Work

In addition to the standard documentation (VOE and pay stub), obtain:

• documentation evidencing the applicant’s total earnings year to date,
• signed and dated individual income tax returns for the previous 2 years, and
• if applicant works out of a union, evidence of the union’s history with the applicant.

Alternative documentation may be submitted in place of a VOE if the lender concludes that the applicant’s income is stable, reliable, and anticipated to continue during the foreseeable future; that is, if the applicant’s income qualifies as effective income. 2 years employment is not required to reach this conclusion.

Alternative documentation consists of:

• Pay stubs covering at least the most recent 30-day period.

Note:  It is acceptable for Department of Defense civilian employees

to provide computer generated pay stubs accessed through myPay (formerly

known as E/MSS – Employee Member Self Service).

• W-2 forms for the previous 2 years.
• Telephone verification of the applicant’s current employment.

Note:  Document the date of verification and the name, title, and telephone

number of the person with whom employment was verified.

If the employer is not willing to give telephone verification of applicant’s employment or the pay stubs or W-2 forms are in any way questionable as to authenticity, use standard documentation.  Alternative documentation cannot be used.

Pay stubs and W-2 forms may be originals or copies certified by the lender to be true copies of the originals.

Fax and Internet documentation may be submitted in place of a VOE if the lender concludes that the applicant’s income is stable, reliable, and anticipated to continue during the foreseeable future; that is, if the applicant’s income qualifies as effective income.

Fax and Internet documentation consists of:

• the same information contained in a standard VOE,
• clear identification of the employer and source of information, and
• name and telephone number of a person who can verify faxed information.

Lenders are responsible for ensuring the authenticity of the documents.  For Faxed documents, review the “banner” information provided at the top of each page of the fax.  For Internet documents, review the information contained on any headers/footers and the banner portion of the downloaded webpage(s).  These pages must contain the uniform resource locator (URL) and the date and time printed.  The documents should also be reviewed for errors such as incorrect area codes, unreadable names or income, etc.

Analysis:  General Guidance

Income analysis is not an exact science.  It requires the lender to underwrite each loan on a case-by-case basis, using:

• judgment,
• common sense, and
• flexibility, when warranted.

Analyze the probability of continued employment (that is, whether income is stable and reliable) by examining the:

• applicant’s past employment record,
• applicant’s training, education, and qualifications for his/her position,
• type of employment, and
• employer’s confirmation of continued employment, if provided.

In the applicant’s current position, 2 years of employment is a positive indicator of continued employment.  It is not a required minimum and not always sufficient by itself to reach a conclusion on the probability of continued employment.

f. Analysis:  Applicant Employed Less Than 12 Months

Assess whether the applicant’s training and/or education equipped him or her with particular skills that relate directly to the duties of his/her current position.  This generally applies to skilled positions.  Examples include nurse, medical technician, lawyer, paralegal, and computer systems analyst.

If the probability of continued employment is high based on these factors, then the lender may give favorable consideration to including the income in the total effective income.  An explanation of why income of less than 12 months duration was used must accompany the loan submission.

If the probability of continued employment is good, but not as well supported, the lender may still consider the income if the applicant has been employed at least 6 months to partially offset debts of 10 to 24 months duration.

Determine the amount which can be used, based on such factors as:

• the employer’s evaluation of the probability of continued employment, if provided, and
• the length of employment (for example, 10 months versus 6 months).

Note: Include an explanation with the loan submission.

g. Analysis:  Recent History of Frequent Changes of Employment

Reference:  See section 4 of “Current Issues” for a discussion of frequent job changes by individuals with low-to-moderate incomes.

Give favorable consideration to changes for the purpose of career advancement in the same or related field.

Favorable consideration may not be possible for changes:

• with no apparent betterment to the applicant, and
• from one line of work to another.

If the lender includes applicant’s income in effective income, an explanation must accompany the loan submission.

h. Income from Overtime Work, Part-time Jobs, Second Jobs, and Bonuses

To include income from these sources in effective income:

• the income must be regular and predictable, and
• there must be a reasonable likelihood that it will continue in the foreseeable future based on
• its compatibility with the hours of duty and other work conditions of the  applicant’s primary job, and
• how long the applicant has been employed under such arrangement.

The lender may use this income, if it is not eligible for inclusion in effective income, but is verified for at least 12 months, to offset debts of 10 to 24 months duration.  Include an explanation.

i. Income from Commissions

When all or a major portion of the applicant’s income is derived from commissions, obtain the following documentation:

• VOE or other written verification which provides the following: 
• the actual amount of commissions paid year-to-date.
• the basis for payment (that is, salary plus commission, straight commission, or draws against commission).
• when commissions are paid (that is, monthly, quarterly, semiannually, or annually).
• Individual income tax returns, signed and dated, plus all applicable schedules for the previous 2 years (or additional periods if needed to demonstrate a satisfactory earnings record).

Analysis

Generally, income from commissions is considered stable when the applicant has obtained such income for at least 2 years.

• Less than 2 years cannot usually be considered stable unless the applicant has had previous related employment and/or extensive specialized training.
• Less than 2 year can rarely qualify.  In-depth development is required for a conclusion of stable income on less than 1 year cases.

j. Self-Employment Income

Obtain the following documentation:

• current financial statements prepared in a generally recognized format, including:

–    year-to-date profit and loss statement

–    current balance sheet

Note:  The financial statements must be sufficient for a loan underwriter to determine the necessary information for loan approval.  The lender may require accountant-prepared financial statements or financial statements audited by a Certified Public Accountant if needed to make such a determination due to the nature of the business or the content of the financial statements.

• individual income tax returns, signed and dated, plus all applicable schedules for the previous 2 years (or additional periods if needed to demonstrate a satisfactory earnings record). 
• if the most recent year’s tax return has not yet been prepared, provide a profit and loss statement for that year, and
• if the business is a corporation or partnership

–    copies of the signed federal business income tax returns for the previous 2 years plus all applicable schedules, and

–    a list of all stockholders or partners showing the interest each holds in the business.

Note:  Obtain a written credit report on the business as well as the applicant as needed.

Analysis

Generally, income from self-employment is considered stable when the applicant has been in business for at least 2 years.

• Less than 2 years cannot usually be considered stable unless the applicant has had previous related employment and/or extensive specialized training.
• Less than 1 year can rarely qualify.
• In-depth development is required for a conclusion of stable income on less than 1 year cases.

If the business shows a steady or significant decline in earnings over the period analyzed, the reasons for such decline must be analyzed to determine whether the trend is likely to continue or be reversed.

If the business is unusual and it is difficult to determine the probability of continued operation, obtain an opinion on viability and future earnings, and an explanation of the function and financial operations of the business from a qualified party.

Depreciation claimed as a deduction on the tax returns and financial statements of the business may be included in effective income.

k. Active Military Applicant’s Income

A military Leave and Earnings Statement (LES) is required instead of a VOE.

• The LES must furnish the same information as a VOE.
• The LES must be no more than 120 days old (180 days for new construction).
• For loans closed automatically, the date of the LES must be within 120 days of the date the note is signed (180 days for new construction).
• For prior approval loans, the date of the LES must be within 120 days of the date the application is received by VA (180 days for new construction).

The LES must be an original or a copy certified by the lender to be a true copy of the original. 

Note:  The Department of Defense provides service members access to a computer generated LES through myPay (formerly known as E/MSS – Employee Member Self Service).  This type of LES is acceptable.

In addition, identify servicemembers who are within 12 months of release from active duty or end of contract term.  Find the date of expiration of the applicant’s current contract for active service on the LES (for an enlisted servicemember).  For a National Guard or Reserve member, find the expiration date of the applicant’s current contract. 

If the date is within 12 months of the anticipated date that the loan will close, the loan package must also include one of the following four items, or combinations of items, to be acceptable:

• documentation that the servicemember has already re-enlisted or extended his/her period of active duty to a date beyond the 12-month period following the projected closing of the loan, or
• verification of a valid offer of local civilian employment following the release from active duty.  All data pertinent to sound underwriting procedures (date employment will begin, earnings, and so on) must be included, or
• a statement from the servicemember that he/she intends to reenlist or extend his/her period of active duty to a date beyond the 12 month period, plus
• a statement from the servicemember’s commanding officer confirming that:

–    the servicemember is eligible to reenlist or extend his/her active duty as indicated, and

–    the commanding officer has no reason to believe that such reenlistment or extension of active duty will not be granted, or

• documentation of other unusually strong positive underwriting factors, such as:

–    a downpayment of at least 10 percent,

–    significant cash reserves, and

–    clear evidence of strong ties to the community coupled with a nonmilitary spouse’s income so high that only minimal income from the active duty servicemember is needed to qualify.

Analysis:  Base Pay

Consider the applicant’s base pay as stable and reliable except if the applicant is within 12 months of release from active duty.

• Analyze the additional documentation submitted.
• If the applicant will not be reenlisting, determine whether:

–    the applicant’s anticipated source of income is stable and reliable, and/or

–    unusually strong underwriting factors compensate for any unknowns regarding future sources of income.

The lender may include a military quarters allowance in effective income if properly verified.  In most areas there will be an additional variable housing allowance, which can also be included.

The military quarters and variable housing allowances are not taxable income.

Ensure that the applicant meets the occupancy requirements set forth in section 5 of chapter 3.

Verification:  Subsistence and Clothing Allowances

Any subsistence (rations) and clothing allowances are indicated on the LES.

Analysis:  Subsistence and Clothing Allowances

The lender may include verified allowances in effective income.  These allowances are not taxable income.

Note:  The clothing allowance generally appears on the LES as an annual amount.  Convert it to a monthly amount for the loan analysis.

Verification:  Other Military Allowances

To consider a military allowance in the underwriting analysis, obtain verification of the type and amount of the military allowance, and how long the applicant has received it.

Analysis:  Other Military Allowances

Examples include propay, flight or hazard pay, overseas pay, and combat pay.

All of these are subject to periodic review and/or testing of the recipient to determine continued eligibility.  These types of allowances are considered taxable income by the IRS, unlike housing, clothing, and subsistence allowances.

Military allowances may be included in effective income only if such income can be expected to continue because of the nature of the recipient’s assigned duties.

Example:  Flight pay verified for a pilot.  If duration of the military allowance cannot be determined, this source of income may still be used to offset obligations of 10 to 24 months duration.

l. Income from Service in the Reserves or National Guard

Otherwise, this income may be used to offset obligations of 10 to 24 months duration.

m. Recently Activated Members of the Reserve or National Guard

If so, lenders must determine what the applicant’s income may be if activated: 

• Reduced, carefully evaluate the impact the reduction may have on the borrower’s ability to repay the loan. 
• Increased, consider the likelihood the income will continue beyond a 12-month period. 

Example:  If an activated reserve/guard member applies for a loan, they may present orders indicating their tour of duty is not to exceed 12 months.  Under these circumstances lenders need to carefully evaluate both the present income (current employment) and expected income (reservist income) in terms of income stability and reliability.

There are no clear-cut procedures that can be applied to all cases.  Evaluate all aspects of each individual case, including credit history, accumulation of assets, overall employment history, etc., and make the best decision for each loan regarding the use of income in qualifying for the loan. 

Weigh the desire to provide a veteran their benefit with the responsibility to ensure the veteran will not be placed in a position of financial hardship.

Lenders should contact the appropriate VA office if any questions arise in reference to unusual circumstances regarding a mobilized servicemember’s income.

n. Income of Recently Discharged Veterans

Obtain verification of any of the following which apply:

• employment income

Reference:  See “Income from Non-Military Employment” in this section for verification requirements.

• retirement income, and
• military separation payments.

If the applicant has been employed in a position for only a short time, obtain a statement from the employer that the applicant is performing the duties of the job satisfactorily and the probability of continued employment is favorable.

Analysis:  Prospects for Continued Employment

Cases involving recently discharged veterans often require the underwriter to exercise a great deal of flexibility and judgment in determining whether the employment income will continue in the foreseeable future.  This is because some veterans may have little or no employment experience other than their military occupation.  Continuity of employment is essential for a veteran with no retirement income or insufficient retirement income to support the loan obligation.

• If the duties the applicant performed in the military are similar or directly related to the duties of the present position, use this as one indicator that the employment is likely to continue.
• If the applicant’s current job requires skills for which the applicant has had no training or experience, greater time in the current job may be needed to establish stability.

If the applicant’s retirement income, compared to total estimated shelter expense, long-term debts, and family living expense is such that only minimal income from employment is necessary to qualify from the income standpoint, resolve doubt in favor of the applicant.

Examples:

Qualifying short-term employment – An applicant who was an airplane mechanic in the military is now employed as an auto mechanic or machinist. 

Nonqualifying short-term employment – An applicant who was an Air Force pilot is now employed as an insurance salesperson on commission. 

Most cases fall somewhere between these extremes.  Fully develop the facts of each case in order to make a determination.

Apply the guidelines under “Self-Employment Income” in this section to a recently discharged veteran who is self-employed.

Analysis:  Voluntary Separation Payments

Two types of voluntary separation payments are used to facilitate military downsizing:

(1)  Special Separation Benefit (SSB)

• A one-time lump sum,
• Taxable in the year received, and
• Treat the same as any substantial cash reserve.

• Annual payments
• Taxable in the year received
• Include in effective income
• Calculated by multiplying the veteran’s years of service times two
• Requires a minimum of 6 years service (equates to a minimum of 12 years annual payments)

If the veteran receives both VSI and VA disability compensation payments, the VSI is reduced by the amount of disability compensation.  However, if the disability compensation is related to an earlier period of service and the VSI a later period of service, the VSI is not reduced by the amount of disability compensation.

VSI is reduced by the amount of any base pay or compensation a member receives for active or reserve service, including inactive duty training.

The veteran can designate a beneficiary for VSI payments in the event of death.

o. Rental Income

Verify:

• cash reserves totaling at least 6 months mortgage payments (principal, interest, taxes, and insurance – PITI), and
• documentation of the applicant’s prior experience managing rental units or other background involving both property maintenance and rental.

Analysis:  Multi-Unit Property Securing the VA Loan

Include the prospective rental income in effective income only if:

• evidence indicates the applicant has a reasonable likelihood of success as a landlord, and
• cash reserves totaling at least 6 months mortgage payments are available.

The amount of rental income to include in effective income is based on 75 percent of:

• verified prior rent collected on the units (existing property), or
• the appraiser’s opinion of the property’s fair monthly rental (proposed construction).

Verification:  Rental of the Property Applicant Occupied Prior to the New Loan

Obtain a copy of the rental agreement on the property, if any.

Analysis:  Rental of the Property Applicant Occupied Prior to the New Loan

Use the prospective rental income only to offset the mortgage payment on the rental property and only if there is no indication that the property will be difficult to rent.  This rental income may not be included in effective income.

Obtain a working knowledge of the local rental market.  If there is no lease on the property, but the local rental market is very strong, the lender may still consider the prospective rental income for offset purposes.

Verification:  Rental of Other Property Not Securing the VA Loan

Obtain the following:

• documentation of cash reserves totaling at least 3 months mortgage payments (principal, interest, taxes, and insurance – PITI), and
• individual income tax returns, signed and dated, plus all applicable schedules for the previous 2 years, which show rental income generated by the property.

Analysis:  Rental of Other Property Not Securing the VA Loan

Rental income verified as stable and reliable may be included in effective income.  If there is little or no prior rental history on the property, make a determination based on review of:

• documentation of the applicant’s prior experience managing rental units or other background involving both property maintenance and rental
• any leases on the property, and
• the strength of the local rental market.

Property depreciation claimed as a deduction on the tax returns may be included in effective income.

p. Alimony, Child Support, and Maintenance Payments

Verify the income if the applicant wants it to be considered.  The payments must be likely to continue in order to include them in effective income.

Factors used to determine whether the payments will continue include, but are not limited to:

• whether the payments are received pursuant to a written agreement or court decree,
• the length of time the payments have been received,
• the regularity of receipt, and
• the availability of procedures to compel payment.

q. Automobile or Similar Allowances

However, in some instances, such an allowance may exceed the car payment.  With proper documentation, income from a car allowance which exceeds the car payment can be counted as effective income.  Likewise, any other similar type of allowance which exceeds the specific expenses involved may be added to gross income to the extent it is documented to exceed the actual expense.

r. Other Types of Income

“Other” types of income which may be considered as effective income include, but are not limited to:

• pension or other retirement benefits,
• disability income,
• dividends from stocks,
• interest from bonds, savings accounts, and so on, and
• royalties.

The lender may include verified income from public assistance programs in effective income if evidence indicates it will probably continue for 3 years or more.

The lender may include verified workers’ compensation income that will continue in the foreseeable future, if the veteran chooses to reveal it.

The lender may include verified income received specifically for the care of any foster child(ren).  Generally, foster care income is to be used only to balance the expenses of caring for the foster child(ren) against any increased residual income requirements.

Do not include temporary income items such as VA educational allowances and unemployment compensation in effective income.

Exception:

If unemployment compensation is a regular part of the applicant’s income due to the nature of his or her employment (for example, seasonal work), it may be included.

Change Date

• This section has been updated to make minor grammatical edits.

a. Income Tax and Social Security Deductions

Determine the appropriate deductions for state and local taxes using similar materials provided by the states.

The lender may consider the applicant’s potential tax benefits from obtaining the loan (for example, mortgage interest deduction) in the analysis.  To do so:

• determine what the applicant’s withholding allowances will be, using the instructions and worksheet portion of IRS Form W-4, Employee’s Withholding Allowance Certificate, and
• apply that withholding number when calculating Federal and state income tax deductions.

b. Income Tax Credits from Mortgage Credit Certificates

Lenders must provide a copy of the MCC to VA with the loan package which indicates:

• the percentage to be used to calculate the tax credit, and
• the amount of the certified indebtedness.  The certified indebtedness can be comprised of a loan incurred by the veteran to acquire a principal residence or a qualified home improvement or rehabilitation loan.

If the percentage on the MCC is more than 20 percent, there is an annual limit on the tax credit equal to the lesser of $2,000 or the borrower’s maximum tax liability.  Calculate the tax credit by applying the specified percentage to the interest paid on the certified indebtedness.  Then, apply the annual limit.

Example:  The MCC shows a 30-percent rate and $100,000 certified indebtedness.  The borrower will pay approximately $8,000 in annual mortgage interest.  Borrower’s estimated total Federal income tax liability is $9,000.  Calculate the tax credit as follows:

• 30 percent of $8,000 = $2,400
• Apply the annual $2,000 limit
• The tax credit will be $2,000
• Use $167 (one-twelfth of $2,000) in the monthly analysis

Note:  If the mortgage on which the borrower pays interest is greater than the amount of certified indebtedness, limit the interest used in the tax credit calculation to that portion attributable to the certified indebtedness.

Change date

• This section has been updated to correct hyperlinks and make minor grammatical edits.

a. Amount of Cash Required

• any closing costs or points which are the applicant’s responsibility and are not financed in the loan,
• the downpayment, if a GPM, and
• the difference between the sales price and the loan amount, if the sales price exceeds the reasonable value established by VA.

VA does not require the applicant to have additional cash to cover a certain number of mortgage payments, unplanned expenses, or other contingencies.

However, the applicant’s ability to accumulate liquid assets and the current availability of liquid assets for unplanned expenses should be considered in the overall credit analysis.

b. Verification Requirement

• Use VA Form 26-8497a, Request for Verification of Deposit, as appropriate, OR
• original or certified true copies of the applicant’s last two bank statements, OR
• the borrower’s bank statements available to them by Internet or Faxed from the depository directly to the lender.  In cases where the lending institution uses Internet based verifications, ensure the URL appears on the document.

Verifications must be no more than 120 days old (180 days for new construction).

For automatically closed loans, this means the date of the deposit verification is within 120 days of the date the note is signed (180 days for new construction).

c. Pending Sale of Real Estate

Sales proceeds may be necessary to make a downpayment or pay closing costs on the VA loan. 

In addition, the lender may want to consider the amount of equity the applicant has accumulated in the property and the extent to which that equity is attributable to the applicant’s investment rather than the housing market, in evaluating the applicant’s ability to manage assets.

The lender may consider any downpayment or costs on the VA loan as provided for by the sale of the property if available information provides a reasonable basis for concluding the equity to be realized from the sale will be sufficient for this purpose. 

References: 

• See section 4 of chapter 5 for prior approval loans which depend upon the sale of property for the borrower to qualify.
• See section 6 of chapter 5 for required loan closing documents.

Change Date

• This section has been updated to correct hyperlinks and make minor grammatical edits.

a. Verification

Obtain a credit report. 

Reference:  See section 7 of this chapter for details on the type of credit report required.

For obligations not included on the credit report which are revealed on the application or through other means, the lender must obtain a verification of deposit showing the obligation or other written verification directly from the creditor.  The lender must also separately verify accounts listed as “will rate by mail only” or “need written authorization.”

When a pay stub or LES statement indicates an allotment, the lender must investigate the nature of the allotment to determine whether the allotment is related to a debt.

For obligations that have not been rated on the credit report or elsewhere, obtain the verification and rating directly from the creditor.  Include a written explanation for any obligation that is not rated.

Resolve all discrepancies.  If the credit report or deposit verification reveals significant debts or obligations which were not divulged by the applicant:

• obtain clarification as to the status of such debts from the applicant, then
• verify any remaining discrepancies with the creditor.

a. Verification (continued)

For automatically closed loans, this means the date of the credit report or verification is within 120 days of the date the note is signed (180 days for new construction).

For prior approval loans, this means the date of the credit report or verification is within 120 days of the date the application is received by VA (180 days for new construction).

ECOA prohibits requests for, or consideration of, credit information on a spouse who will not be contractually obligated on the loan except:

• if the applicant is relying on alimony, child support, or maintenance payments from the spouse (or former spouse), or
• in community property states.

              -If the property is located in a community property state, VA requires consideration of the spouse’s credit information (whether or not the spouse will be personally liable on the note and whether or not the applicant and spouse choose to have the spouse’s income considered).

b. Verification of Alimony and Child Support Obligations

Do not request documentation of an applicant’s divorce unless it is necessary to verify the amount of any alimony or child support liability indicated by the applicant.  If, however, in the routine course of processing the loan, the lender encounters direct evidence (such as, in the credit report) that a child support or alimony obligation exists, make any inquiries necessary to resolve discrepancies and obtain the appropriate verification.

c. Analysis of Debts and Obligations

• debts and obligations with a remaining term of 10 months or more; that is, long-term obligations, and
• accounts with a term less than 10 months that require payments so large as to cause a severe impact on the family’s resources for any period of time.

Example:  Monthly payments of $300 on an auto loan with a remaining balance of $1,500, even though it should be paid out in 5 months, would be considered significant.  The payment amount is so large as to cause a severe impact on the family’s resources during the first, most critical, months of the home loan.

Determine whether debts and obligations which do not fit the description of “significant” should be given any weight in the analysis.  They may have an impact on the applicant’s ability to provide for family living expenses.

If a married veteran wants to obtain the loan in his or her name only, the veteran may do so without regard to the spouse’s debts and obligations in a non-community property state.  However, in community property states, the spouse’s debts and obligations must be considered even if the veteran wishes to obtain the loan in his or her name only.

Debts assigned to an ex-spouse by a divorce decree will not generally be charged against a veteran-borrower.  This includes debts that are now delinquent.

d. Applicant as Co-obligor on Another’s Loan

• there is evidence that the loan payments are being made by someone else, and
• there is no reason to believe that the applicant will have to participate in repayment of the loan, then
• the lender may exclude the loan payments from the monthly obligations factored into the net effective income calculation in the loan analysis.

e. Pending Sale of Real Estate

• clear the outstanding mortgage(s) against the property,
• pay off outstanding consumer obligations, and/or
• make a downpayment or pay closing costs on the VA loan.

Alternatively, the veteran may intend to sell the property with the buyer assuming the outstanding mortgage obligation.

The lender may disregard the payments on the outstanding mortgage(s) and any consumer obligations which the veteran intends to clear if available information provides a reasonable basis for concluding the equity to be realized from the sale will be sufficient for this purpose.

References: 

See section 4 of chapter 5 for prior approval loans dependent upon the sale of property for the borrower to qualify.

See section 6 of chapter 5 for required loan closing documents.

f. Secondary Borrowing

Reference:  See section 4 of chapter 9 for VA limitations on secondary borrowing.

From an underwriting standpoint, the veteran must not be placed in a substantially worse position than if the entire amount borrowed had been guaranteed by VA.

g. Deferred Student Loan Payments

h. Loans Secured By Deposited Funds

Note: Assets securing these loans may not be included as an asset in the loan analysis.