What is VA Manual Underwriting?

VA manual underwriting is a comprehensive, human-reviewed loan approval process used when the VA’s Automated Underwriting System (AUS) cannot provide a clear “Approve/Eligible” decision. Instead of relying solely on computer algorithms, a trained VA underwriter manually reviews your entire financial profile to determine if you qualify.

Key point: A “Refer/Eligible” response from AUS doesn’t mean rejection—it simply means your file requires manual review by a VA-trained underwriter who has the authority to approve loans that don’t fit standard automated guidelines.

Why Manual Underwriting Happens: Common Reasons

The VA’s AUS system routes loans to manual underwriting for several reasons. Understanding why your loan was referred can help you prepare for the review process.

• Limited or Short Credit History If you’re new to credit or have only a few trade lines, AUS may not have enough data to make an automated decision.
• Low Credit Score Credit scores below 620 require manual review. Many lenders will manually underwrite scores between 580-619.
• High Debt-to-Income Ratio If your DTI exceeds standard guidelines (typically 41% for VA loans), manual underwriters can use compensating factors to approve you.
• Recent Financial Hardship Recent bankruptcy, foreclosure, short sale, or loan modification may trigger manual review to verify you’ve recovered.
• Unstable Employment History Job changes, gaps in employment, or self-employment require manual review to verify income stability.
• Insufficient Seasoning Recent large deposits or gifts require documentation that funds are genuinely yours (not borrowed).
• Non-Traditional Credit If you’re a credit-invisible veteran with no traditional credit history, manual underwriting can consider alternative credit data.
• Co-Borrower or Non-Occupant Co-Borrower Loans with additional borrowers or non-occupant co-borrowers require manual review of combined finances.

Key Manual Underwriting Requirements for VA Loans

While manual underwriting is more flexible than automated decisions, VA lenders still follow strict VA guidelines. Here are the core requirements your file must meet:

1. Debt-to-Income (DTI) Requirements

• Standard DTI: 41% or Lower Most VA lenders cap manual underwriting at 41% back-end DTI, though some VA-approved lenders will go to 45% with strong compensating factors.
• What DTI Includes: Mortgage payment, property taxes, homeowners insurance, HOA fees, car payments, student loans, credit cards, and any other monthly debt obligations.
• What DTI Excludes: Utilities, food, gas, insurance, childcare, and medical expenses are NOT included in DTI calculations.

2. Credit History Requirements

• Minimum 12 Months Clean Payment History You need at least 12 months of on-time payments on rent or mortgage, utility bills, and credit accounts. No 30-day late payments in the past 12 months.
• No Recent Collections or Charge-Offs Recent collections must be paid or have a payment plan in place with 6+ months of on-time payments documented.
• Credit Score: 620 Minimum The VA itself doesn’t set a minimum credit score, but most VA lenders require minimum 620 FICO for manual underwriting. Some VA specialists will manually underwrite scores as low as 580 with strong compensating factors.

3. Employment & Income Requirements

• Stable 2-Year Employment History You must show 2 years of continuous employment or be in the same field with the same type of work. Job changes within the same industry are typically acceptable.
• Recent Job Change (Less Than 3 Months) If you’ve changed jobs within the past 3 months, the new employer must confirm you’ll continue in this position.
• Self-Employment Self-employed veterans need 2 years of business tax returns showing stable or growing income.
• Income Verification Current pay stubs (30 days or less old), W-2s or tax returns, and employer verification letter required.

4. Residual Income Requirements (Critical!)

• Residual Income Must Meet VA Standards After housing payment, property taxes, insurance, HOA, child support, and all other debts, you must have sufficient money left over based on VA tables. See detailed residual income section below.

Compensating Factors That Strengthen VA Manual Underwriting Approval

Compensating factors are strengths in your application that offset weaknesses, like a lower credit score or higher DTI. VA lenders use these to justify approving loans that don’t meet all standard guidelines.

• Low Payment Shock If your new mortgage payment is significantly lower than your current rent, this demonstrates you can easily afford the new payment. Payment shock under 10% is excellent.
• Strong Cash Reserves Having substantial savings (3-6 months of housing payments or more) after closing shows financial stability and reduces default risk. This is one of the strongest compensating factors.
• Significant Down Payment Even though VA loans allow 0% down, putting 5-10% down shows commitment and reduces lender risk. This is a powerful compensating factor.
• Household Income Stability from Multiple Earners If you have a spouse with stable income, or additional household earners, this strengthens your application. Combined household income is considered.
• Perfect Utility & Insurance Payment History 12+ months of on-time utility, phone, and insurance payments demonstrate financial responsibility to creditors not on credit reports.
• Significant Recent Debt Payoff If you’ve recently paid off a major debt (car loan, student loan, credit card), this shows positive financial management and improves your DTI.
• Excellent Military Service Record Strong character references, awards, and promotions demonstrate reliability and stability.
• Rate Lock History A long history with the same employer (especially if military-friendly) shows stability employers value.
• Co-Borrower with Excellent Credit A spouse or co-borrower with strong credit (700+) and income helps offset your weaker profile.
• Credit Improvement Trend If your credit has been steadily improving over the past 12 months, this shows positive trajectory.

VA Residual Income Requirements: The Critical Factor

Residual income is one of the most important (and often misunderstood) factors in VA manual underwriting. It’s the amount of money left over each month after all debt payments are made.

VA Residual Income by Region & Family Size

The VA publishes residual income requirement tables based on loan amount and number of dependents. Here’s how it works:

Example: How Residual Income Works

Important: If your residual income falls short, there are strategies to improve it: add household income, pay off debts, or look at a lower loan amount. Your Kentucky VA specialist can model these scenarios.

Manual vs. Automated Underwriting: Key Differences

Step-by-Step VA Manual Underwriting Approval Process

1. VA Loan Pre-Qualification Contact your Kentucky VA lender (like myself) for a free pre-qualification. I’ll gather basic information about your military service, income, debts, and credit situation.
2. Certificate of Eligibility (COE) Verification Provide your COE from VA.gov or obtain it through the VA. This confirms your military service and VA loan entitlement.
3. Formal VA Loan Application Complete full mortgage application (Form 1003) with detailed financial information, employment history, and authorization for credit check.
4. Document Submission Provide pay stubs (30 days old or less), last 2 years tax returns, W-2s, bank statements showing 2 months history, and employment verification letter.
5. Automated Underwriting System (AUS) Review Loan is submitted to VA AUS. If approved, loan moves forward quickly. If “Refer/Eligible,” file is flagged for manual underwriting.
6. Property Appraisal Ordered VA appraisal ordered to establish property value and verify it meets VA standards (no health/safety defects).
7. Manual Underwriter Assignment If “Refer” decision received, file is assigned to a VA-trained manual underwriter for comprehensive review.
8. Underwriter Requests Additional Documentation Underwriter may request additional items: explanation letters for late payments, updated employment verification, additional financial statements, or clarification on compensating factors.
9. Underwriter Review & Decision Underwriter reviews entire file, weighs compensating factors, verifies residual income, and makes approval decision (Approve, Conditional, or Deny).
10. Clear Conditional Items If “Conditional,” you’ll need to provide additional documentation or meet specific requirements (pay off debt, provide updated paystubs, explain credit issues, etc.).
11. Clear to Close Once all conditions met and underwriter approves final file, you receive “Clear to Close” status from lender.
12. Final Walk-Through & Closing Complete final walk-through of property, sign closing documents, and officially become a homeowner with your VA loan!

Frequently Asked Questions: VA Manual Underwriting in Kentucky

Why Choose a Kentucky VA Manual Underwriting Specialist?

Not all VA lenders are created equal when it comes to manual underwriting. Many use automated systems and struggle with referral cases. Here’s why you need a specialist:

• Direct Relationships with VA Underwriters I have direct relationships with VA-approved lenders’ underwriting teams, so I can present your case persuasively and get quicker decisions.
• Expertise in Compensating Factors I know which factors matter most to VA underwriters and can position your application to highlight your strengths.
• Navigating Residual Income Understanding VA residual income tables is complex. I’ll calculate yours accurately and explore ways to improve it if needed.
• Strategic Document Preparation The way you explain past credit issues matters. I’ll help you craft explanations that underwriters want to hear.
• Fast Processing & Communication I personally manage your file and communicate directly with underwriters, keeping you informed every step.
• All 120 Kentucky Counties Covered Whether you’re buying in Louisville, Lexington, rural areas, or anywhere in Kentucky, I serve all counties with VA manual underwriting expertise.
• Over 1,300 Kentucky Families Helped My 20-year track record shows I get results, including many manual underwriting approvals other lenders thought impossible.