Understanding the VA Loan Process

The VA does not lend you money. Instead, its role is to guarantee your lender against loss in case of default. So, how does the VA loan approval process work?

At its core, the process is fairly simple: no matter which lender you choose, your application will be run through Fannie Mae’s automated underwriting system, known as the Desktop Underwriter (DU). There’s also Freddie Mac’s version, LP, which can be slightly more lenient, but we’ll focus on DU for this explanation.

The DU system evaluates your credit, income, assets, and other factors, taking about 30 seconds to generate an accurate decision on whether you qualify. However, accuracy is key—if the information you input is incorrect, your results can be impacted.

Many online applications leave it to the borrower to estimate their income, which often differs from how lenders calculate it. For example, overtime, commissions, bonuses, and the length of time these are earned can all affect how income is calculated for lending purposes.

A skilled loan officer will take the time to ask the right questions and accurately calculate your income. If your loan officer doesn’t invest the time to ensure your figures are correct, it’s time to find someone else.

The Role of the Loan Officer and Algorithm

The automated underwriting system uses an algorithm that takes into account your credit, income, and assets. Small changes can make a huge difference—this is where experience matters. A good loan officer knows what variables can be adjusted to turn a denial into an approval, whether that’s improving your credit score or tweaking your reserves.

For example, reserves—funds left over after closing—can greatly improve your chances of approval. If your proposed mortgage payment is $2,500, and you’re bringing $10,000 to closing, showing an additional $2,500 in reserves (for a total of $12,500) demonstrates that you can cover an additional month of mortgage payments if needed.

Other factors, such as Debt-to-Income (DTI) ratio, also play a role. A strong credit score can allow for higher DTI ratios, but if your credit is weaker, you’ll likely need a lower DTI to qualify.

What Happens if You Fail Automated Underwriting?

If your application fails the automated underwriting system, a manual underwrite could be the next step. In this process, an underwriter makes a discretionary decision on your file, following VA guidelines. One major disqualifier for manual underwriting is recent late payments or non-medical collections within the last 12 months.

If you don’t have these issues, the underwriter will look for “compensating factors,” such as:

• Excellent credit history
• Conservative credit usage
• Minimal consumer debt
• Stable employment history
• Significant reserves
• A down payment
• Military benefits or previous satisfactory mortgage history
• High residual income and low DTI

The VA wants to give veterans and service members the opportunity to own homes—they’ve earned it!

Alternative: FHA Loans

If a VA loan isn’t an option in the short term, an FHA loan may be a viable alternative. FHA loans are more lenient in certain areas and may allow you to qualify even if a VA loan isn’t possible. However, there are key differences:

• VA loans typically don’t require a down payment (in most cases), while FHA loans require 3.5%.
• VA loans don’t have monthly mortgage insurance, but FHA loans do.

If you can handle the down payment and mortgage insurance, FHA may be a good choice to get into a home.

Especially in today’s higher interest rate environment, you could refinance to a VA loan later for a better rate and to eliminate mortgage insurance.