If you’ve been told you don’t qualify for a VA loan through traditional channels, don’t lose hope just yet. There’s a lesser-known process called manual underwriting that might just be the solution.
Manual underwriting takes a more comprehensive approach to evaluating your financial profile, allowing veterans who don’t meet automated underwriting criteria to still secure a VA loan. It’s an opportunity to show lenders that you’re a good candidate, even if your credit score or debt-to-income ratio doesn’t fit the typical mold.
Let’s do a deep dive into manual underwriting for a VA loan, including how it works, what lenders are looking for, and tips to increase your chances of approval. We’ll also share some expert insights and real-life examples to help you understand the process better.
In this Article
What is Manual Underwriting?
Manual underwriting is when the automatic system can’t approve your loan and a human manually underwrites your loan application. Unlike automated underwriting systems (AUS), which rely on algorithms and preset criteria, manual underwriting allows for a personalized evaluation. It’s used when your loan application doesn’t meet the requirements for automated approval. This might be due to:
- A lower credit score.
- A high debt-to-income (DTI) ratio.
- Recent financial hardships (e.g., bankruptcy or foreclosure).
- Limited credit history.
The goal of manual underwriting is to give veterans with unique financial situations a fair chance at qualifying for a loan. Underwriters will consider factors like your employment history, savings, and overall financial stability.
How Does Manual Underwriting Work?
Let’s say your VA loan application gets flagged for manual underwriting. Here’s what typically happens next:
- Credit Report and History Review: The underwriter looks beyond just your credit score. They’ll consider the details of your payment history, length of credit, and any negative marks, such as missed payments or collections.
- Income and Employment Verification: Your income sources are reviewed to ensure they’re stable and sufficient. If you’re self-employed, have non-traditional income, or have recently changed jobs, the underwriter will want more detailed documentation.
- Debt-to-Income (DTI) Ratio Evaluation: A high DTI ratio is a common reason loans are flagged for manual underwriting. While the VA recommends a maximum DTI of 41%, manual underwriters may approve higher DTIs if you have compensating factors like high residual income or savings.
- Residual Income Assessment: Residual income is the money you have left after paying all monthly debts and obligations. The VA has specific residual income guidelines, which manual underwriters use to ensure you can cover basic living expenses.
- Compensating Factors Consideration: Compensating factors include things like significant savings, additional income sources, or a strong job history. These can help offset weaker aspects of your application.
Example: If your DTI ratio is 45% (higher than the recommended 41%) but you have $10,000 in savings and a solid job history, these compensating factors might convince the underwriter that you’re still a good candidate for the loan.
Reasons Your VA Loan Might Go to Manual Underwriting
So why would a lender choose manual underwriting for your VA loan? Here are a few common reasons:
- Credit Score Is Too Low: Most lenders want to see a minimum credit score of 620 for a VA loan. If your score is lower, it might trigger a manual review.
- High DTI Ratio: If your debt-to-income ratio is above 41%, your loan might be sent to manual underwriting for a closer look.
- Recent Financial Hardships: If you’ve experienced a bankruptcy, foreclosure, or other financial setbacks in recent years, a manual review will help the underwriter assess your current financial stability.
- Limited or Non-Traditional Credit History: Manual underwriting allows underwriters to look at alternative credit data, such as on-time rent payments or utility bill history, which aren’t always considered in automated systems.
What Do Lenders Look for During Manual Underwriting?
Manual underwriting is a more detailed process, so lenders will dig deep into your financial profile. Here’s what they’ll look for:
- Consistent Income: They want to see a stable income history over the past two years. This includes reviewing your job history and sources of income (e.g., salary, self-employment, part-time work).
- Savings and Assets: A strong cash reserve can serve as a compensating factor, especially if your DTI is higher than recommended. It shows that you have a safety net in case of unexpected expenses.
- Payment History: Lenders pay close attention to your payment history. If you’ve had a few late payments, they’ll want to see a pattern of on-time payments since then.
- Compensating Factors: Things like having a significant down payment (if you choose to make one), additional income, or strong residual income can help strengthen your application.
Tip: Provide as much documentation as possible to support your financial stability. This can include bank statements, employment letters, and letters of explanation for any financial setbacks.
Benefits of Manual Underwriting
- More Flexibility: If you don’t meet the standard VA loan requirements, manual underwriting can offer flexibility.
- Opportunity to Explain Financial Setbacks: You can provide a letter of explanation to describe any temporary financial issues and how you’ve improved your situation.
- Consideration of the Complete Financial Picture: Manual underwriters look at compensating factors that might not be considered in automated underwriting.
Example: Let’s say you had a period of unemployment two years ago but have since secured a stable, well-paying job. Manual underwriting allows you to explain the situation and demonstrate your current financial stability.
Current Housing Market Overview
The current housing market is in a unique position. As of 2024, interest rates have risen slightly, which has affected affordability for many buyers. However, VA loans continue to be an attractive option for veterans, offering no down payment and competitive interest rates.
According to the National Association of Realtors, the median home price nationwide is around $405,000, which makes the VA loan’s benefits even more appealing.
For veterans who don’t meet traditional requirements, manual underwriting can be a pathway to homeownership, especially in competitive markets where every advantage counts.
Comparison of VA Loan Benefits vs. Conventional Loans
| Feature | VA Loans | Conventional Loans |
|---|---|---|
| Down Payment | None required | 5% – 20% of the home’s price |
| PMI (Private Mortgage Insurance) | Not required | Required if down payment <20% |
| Credit Score Requirements | No set minimum (Lenders prefer 620+) | Minimum of 620 – 700 |
| Interest Rates | Typically lower | Varies based on credit score |
| Prepayment Penalties | None | May have penalties |
| Residual Income Requirement | Yes | No |
Expert Insights on Manual Underwriting for VA Loans
“Manual underwriting is a fantastic option for veterans with non-traditional credit profiles,” says David Turner, Senior Underwriter at Valor Mortgage Solutions. “It allows us to consider the full picture, including compensating factors that might not fit into the automated system. Many veterans have unique financial situations, and manual underwriting ensures they aren’t automatically excluded.”
“Understanding your residual income is key,” adds Laura Stevens, Loan Officer at Patriot Lending Group. “Even if your DTI ratio is higher than average, a strong residual income can significantly improve your chances of approval.”
Tips for Navigating Manual Underwriting on a VA Loan
- Save for Reserves: Building up additional cash reserves can serve as a compensating factor.
- Reduce Your Debt: Paying down credit card balances or other debts can lower your DTI ratio.
- Highlight Stable Employment: Demonstrate a stable job history or consistent self-employment income over the past two years.
- Provide a Letter of Explanation: If you’ve had recent financial setbacks, include a letter explaining the circumstances and how you’ve overcome them.
The Bottom Line
Manual underwriting is a game-changer for veterans who might not meet the standard VA loan criteria. While it’s more detailed and time-consuming, it offers a second chance for veterans to prove their creditworthiness and secure home financing.
With proper preparation, strong compensating factors, and guidance from a VA-savvy lender, manual underwriting can pave the way to homeownership.
If you’re considering a VA loan and don’t think you’ll qualify through automated processes, speak with a lender experienced in manual underwriting. They can guide you through the process and help you present your financial situation in the best possible light.
FAQ About Manual Underwriting on a VA Loan
Can I still get a VA loan if I don’t meet the automated approval criteria?
Yes, you can still qualify through manual underwriting, which takes a closer look at your financial profile.
What compensating factors can help me qualify during manual underwriting?
Strong residual income, additional savings, a good payment history, and a stable employment record are all positive compensating factors.
What credit score is needed for manual underwriting on a VA loan?
There is no set minimum, but most lenders prefer a score of 580 or higher for manual underwriting.
How does manual underwriting affect my interest rate?
Manual underwriting itself doesn’t affect your interest rate, but other factors like credit score and DTI ratio might.
Is manual underwriting only used for VA loans?
No, manual underwriting can be used for other loan types as well, such as FHA and USDA loans.
How long does manual underwriting take?
It typically takes longer than automated underwriting, often between one to two weeks, depending on the complexity of your application.
Can I apply for manual underwriting if I was denied through automated underwriting?
Yes, your lender can submit your application for manual underwriting if you were initially denied.
What happens if my manual underwriting application is denied?
If denied, you can ask your lender for feedback on why and work on improving your financial profile before reapplying.
