AUS Refer Files, Compensating Factors, and Manual Review
VA Manual Underwriting: When AUS Returns Refer
VA manual underwriting is a human review of a loan file when the automated underwriting system returns a Refer finding or when an Accept/Approve is downgraded during verification. A Refer is a risk classification, not a denial. The underwriter evaluates residual income, payment history, debt ratios, and compensating factors to determine whether the complete file supports approval. VA has no minimum credit score. [VA rule — VA Credit Standards FAQ]
Next step:
Check Your VA Loan Eligibility
Check Your VA Loan Eligibility for Manual Underwriting
Manual underwriting applies when the automated system returns a Refer finding, or when an Accept/Approve is downgraded during verification. Not all lenders offer it. Those that do evaluate the full file: residual income, payment history, reserves, compensating factors. This tool identifies whether a file fits the manual-underwriting lane and which lenders accept Refer files.
Key VA Rules
- No minimum score: VA does not use credit scoring. Lenders set their own score overlays. [VA rule — Ch. 4, Topic 7]
- DTI guide, not cap: 41% is a guide; DTI is secondary to residual income. Above 41% requires closer scrutiny. [VA rule — Ch. 4, Topic 10b]
- 24-month rent history: On a Refer, the borrower’s most recent 24-month rental history must be verified. [AUS documentation rule — Ch. 4, Topic 8, Table 5]
- Residual income: An inadequate residual income alone can be a basis for disapproving a loan. [VA rule — Ch. 4, Topic 10a]
Compensating Factors
- Residual cushion: High residual income above the VA regional guideline signals capacity to absorb payment pressure. [VA rule — Ch. 4, Topic 10d]
- Low payment shock: Little or no increase in shelter expense reduces default risk in the reviewer’s analysis. [VA rule — Ch. 4, Topic 10e]
- Significant liquid assets: Verified savings or retirement assets provide a buffer against unplanned events. [VA rule — Ch. 4, Topic 10d]
- Cannot cure bad credit: Compensating factors cannot be used to compensate for unsatisfactory credit. [VA rule — Ch. 4, Topic 10d]
Process
- Trigger: AUS returns Refer/Eligible, or an Accept/Approve is downgraded during verification. [VA rule — Ch. 4, Topic 8, Table 5]
- Timeline: VA imposes no additional waiting period for a manually underwritten file. With a complete documentation package and an experienced lender, it need not take longer. [Network experience]
- Documentation: Expect 24-month VOR, reserve sourcing, credit explanations, and student loan documentation beyond standard automated requirements. [AUS documentation rule — Ch. 4, Topic 8, Table 5]
- Lender pool: Not all VA lenders offer manual underwriting. Availability varies by lender. [Network experience]
Who It Fits
- Lower scores: Borrowers with scores in the 550–620 range and clean recent history are common candidates, though VA sets no minimum. [Network experience]
- Post-event rebuild: After bankruptcy or foreclosure, manual review evaluates recovery evidence once VA waiting periods are met. [VA rule — Ch. 4, Topic 7]
- Thin files: Absence of a credit history is not generally considered an adverse factor. Alternative credit may be used. [VA rule — Ch. 4, Topic 7]
- Active Chapter 13: VA allows favorable consideration with 12 months of satisfactory trustee payments and approval from the Trustee or the Bankruptcy Judge. [VA rule — Ch. 4, Topic 7]
Top questions before you dig in
What triggers VA manual underwriting?
How many months of rent history does a Refer need?
Does VA set a minimum credit score for manual underwriting?
VA Rule or Lender Overlay?
Most of the friction in manual underwriting comes from lender overlays, not VA guidelines. The VA publishes broad credit standards and expects case-by-case judgment. Lenders then add their own requirements — score floors, DTI caps, reserve minimums — that are stricter than what the VA requires. Knowing which rules come from the VA and which come from the lender determines whether a denial is final or whether another lender might approve the same file.
| Issue | VA Baseline | Common Lender Overlay | What to Ask |
|---|---|---|---|
| Minimum credit score | None. VA does not use credit scoring. [VA rule — Ch. 4, Topic 7; VA Credit Standards FAQ] | Many lenders require 580–640 for manual files. [Common lender overlay] | “What is your minimum score for a manually underwritten VA loan?” |
| DTI | 41% is a guide, not a cap. DTI is secondary to residual income. [VA rule — Ch. 4, Topic 10b] | Some cap manual files at 45% or 50%. [Common lender overlay] | “What is your maximum DTI for manual underwriting?” |
| Residual income | VA publishes regional minimums as a guide. An inadequate residual income alone can be a basis for disapproval. [VA rule — Ch. 4, Topic 10a] | Some lenders require 120% or more of the VA guideline on all manual files. [Common lender overlay] | “Do you require residual income above the VA minimum on Refer files?” |
| Rent history on Refer | 24-month rental history from the landlord, credit report, or cancelled checks. [AUS documentation rule — Ch. 4, Topic 8, Table 5] | Some lenders accept 12 months. [Common lender overlay] | “Do you follow the VA’s 24-month VOR requirement or a shorter period?” |
| Reserves | VA names “significant liquid assets” as a compensating factor. No specific month count for non-rental purchases. [VA rule — Ch. 4, Topic 10d] | Many lenders require 2–3 months PITI in verified reserves. [Common lender overlay] | “How many months of reserves do you require on manual files?” |
| Chapter 13 | Favorable consideration with 12 months of satisfactory payments and approval from the Trustee or the Bankruptcy Judge. [VA rule — Ch. 4, Topic 7] | Most lenders require full discharge. [Common lender overlay] | “Do you manual-underwrite active Chapter 13 cases, or only after discharge?” |
| Chapter 7 seasoning | Discharged >2 years: may be disregarded. 1–2 years: requires re-established credit and cause beyond borrower’s control. [VA rule — Ch. 4, Topic 7] | Some lenders require 2+ years regardless of circumstances. [Common lender overlay] | “Will you consider a Chapter 7 discharged between 1 and 2 years ago?” |
| Foreclosure seasoning | Finalized >2 years: may be disregarded. 1–2 years: same two conditions as Chapter 7. [VA rule — Ch. 4, Topic 7] | Some lenders require 3+ years. [Common lender overlay] | “What is your seasoning requirement for a foreclosure on a manual file?” |
| Student loans | Deferred 12+ months beyond closing: no payment counted. Otherwise: 5% of balance ÷ 12, or credit report payment if higher. [VA rule — Ch. 4, Topic 5f] | Some lenders use a lower threshold (0.5% or 1%) regardless of VA rules. [Common lender overlay] | “How do you calculate the monthly student loan payment for DTI?” |
| Number of tradelines | No minimum. Absence of credit is not adverse. [VA rule — Ch. 4, Topic 7; 2023 LGY Conference] | Some lenders require 3–4 active tradelines. [Common lender overlay] | “Do you require a minimum number of tradelines?” |
| Recent lates | On a Refer, a written explanation is required for mortgage payments with more than one 30-day late in 12 months. [AUS documentation rule — Ch. 4, Topic 8, Table 5] | Some lenders decline any late payment in the past 12 months on manual files. [Common lender overlay] | “How do you treat recent lates on a manual underwrite?” |
| Employment length | “Long-term employment” is a compensating factor. No specific duration. [VA rule — Ch. 4, Topic 10d] | Many lenders require 24 months in the same field. [Common lender overlay] | “What is your employment-history requirement for manual files?” |
Source: VA Pamphlet 26-7, Ch. 4 (Topics 5f, 7, 8, 10a, 10b, 10d); VA Credit Standards FAQ; 2023 LGY Conference. Overlays are representative, not exhaustive. Verified September 21, 2026.
What Does Each AUS Finding Mean
VA has approved Freddie Mac’s Loan Product Advisor (LPA), Fannie Mae’s Desktop Underwriter (DU), and VA-approved proprietary lender AUS systems. These systems use different terminology — DU uses “Approve” and LPA uses “Accept” — but the outcomes map to the same VA documentation requirements. The automated systems do not approve or disapprove loans; they determine a risk classification. [VA rule — Ch. 4, Topic 8a]
| DU Term | LPA Term | Practical Meaning | What Happens Next |
|---|---|---|---|
| Approve/Eligible | Accept/Eligible | File meets automated standards and is program-eligible. | Reduced documentation. Standard processing. Fastest path to closing. |
| Approve/Ineligible | Accept/Ineligible | Borrower qualifies financially but fails a program check — COE, property type, or entitlement. | Resolve eligibility issue, re-run AUS once fixed. |
| Refer/Eligible | Refer/Eligible | Program-eligible but the automated system cannot approve the financial profile. | Lender submits to a human reviewer if they offer manual underwriting. Most common manual trigger. |
| Refer with Caution | Refer with Caution | Significant risk factors — recent major derogatories, CAIVRS hits, or severely insufficient income. | Very few lenders will manual-underwrite. Compensating factors must be strong. |
Source: VA Pamphlet 26-7, Ch. 4, Topic 8a. VA accepts multiple AUS platforms. Verified September 21, 2026.
Some loan officers submit the file to both DU and LPA. One system may issue Approve/Eligible while the other issues Refer/Eligible on the same file. If a lender ran only one system, ask whether running the other might produce a better finding — it costs nothing to check. [Network experience]
Refer vs. Accept/Approve: What Documentation Changes
When the AUS returns a Refer finding, the documentation burden increases. VA Pamphlet 26-7, Chapter 4, Topic 8, Table 5 specifies the differences. An Accept/Approve file benefits from reduced documentation requirements; a Refer file requires the full manual package.
| Item | AUS Refer | Accept/Approve |
|---|---|---|
| Rental payment history | Provide a 24-month rental history directly from the landlord, through information shown on the credit report, or by cancelled checks. [AUS documentation rule — Ch. 4, Topic 8, Table 5] | No verification of rent is required. [AUS documentation rule — Ch. 4, Topic 8, Table 5] |
| Derogatory credit | Obtain explanation for derogatory credit. Explain assessment of creditworthiness on VA Form 26-6393. [AUS documentation rule — Ch. 4, Topic 8, Table 5] | No determination of creditworthiness is required. [AUS documentation rule — Ch. 4, Topic 8, Table 5] |
| Significant unreported debts | Obtain direct verification for significant debts not reported on the credit report. Significant means a monthly payment exceeding 2% of stable monthly income. [AUS documentation rule — Ch. 4, Topic 8, Table 5] | Same as Refer. Additionally, perform manual downgrade to Refer if direct verification reveals more than one 30-day late payment in 12 months on any omitted debt. [AUS documentation rule — Ch. 4, Topic 8, Table 5] |
| Mortgage payment history | Obtain direct verification when ratings are not available on outstanding, assumed, or recently retired mortgages. Written explanation required for more than one 30-day late in 12 months. [AUS documentation rule — Ch. 4, Topic 8, Table 5] | Perform manual downgrade to Refer for any mortgage debt with more than one 30-day late payment in 12 months. [AUS documentation rule — Ch. 4, Topic 8, Table 5] |
| Underwriter analysis | Underwriter’s signature on VA Form 26-6393 (Items 49–53) is required. [AUS documentation rule — Ch. 4, Topic 8b] | Underwriter’s signature on VA Form 26-6393 is not required for cases receiving Accept/Approve. [AUS documentation rule — Ch. 4, Topic 8b] |
| Employment gaps | No explanation required for gaps under 30 days. [AUS documentation rule — Ch. 4, Topic 8, Table 6] | No explanation required for gaps under 60 days. [AUS documentation rule — Ch. 4, Topic 8, Table 6] |
Source: VA Pamphlet 26-7, Ch. 4, Topic 8, Tables 5–6. Verified September 21, 2026.
Significant Debts Not on the Credit Report
On a Refer file, the lender must obtain direct verification for debts not appearing on the credit report when the monthly payment exceeds 2% of stable monthly income for all borrowers. This threshold applies to both Refer and Accept/Approve files, but on an Accept/Approve, discovering more than one 30-day late in 12 months on any omitted debt triggers a manual downgrade to Refer. [AUS documentation rule — Ch. 4, Topic 8, Table 5]
The Official VA DTI Rule
VA’s debt-to-income ratio is a guide, not a ceiling. It is secondary to residual income in VA’s underwriting framework. VA publishes no tiered table, no specific compensating-factor count by DTI band, and no hard maximum. The complete VA DTI rule, from Chapter 4, Topic 10b:
- The debt-to-income ratio is a guide and, as an underwriting factor, it is secondary to the residual income. It should not automatically trigger approval or rejection of a loan. [VA rule — Ch. 4, Topic 10b]
- A ratio greater than 41% requires close scrutiny. [VA rule — Ch. 4, Topic 10b]
- If residual income exceeds the guideline by at least 20% (that is, residual income is at or above 120% of the applicable VA regional minimum), the loan may be approved with justification — the additional requirement of the underwriter’s supervisor signing the justification statement is removed. [VA rule — Ch. 4, Topic 10b]
- If residual income does not exceed the guideline by 20%, DTI above 41% requires a signed justification statement from the underwriter’s supervisor listing the compensating factors that support approval. [VA rule — Ch. 4, Topic 10b]
- Tax-free income (such as VA disability) may be “grossed up” using a factor of 125% before calculating the ratio. If grossing up is used, the actual and grossed-up ratio must both be noted. [VA rule — Ch. 4, Topic 9f]
- An inadequate residual income alone can be a basis for disapproving a loan — even when DTI is within guidelines. [VA rule — Ch. 4, Topic 10a]
If the VA residual income guideline for a borrower’s region and family size is $1,000/month, the 20% threshold is $1,200/month. At that level, a DTI above 41% does not require the supervisor’s additional sign-off — the underwriter can justify the approval directly. Below $1,200, the supervisor must co-sign the justification. Note: meeting the residual income guideline is explicitly not a compensating factor. Only residual income meaningfully above the guideline carries weight. [VA rule — Ch. 4, Topic 10d]
“VA guideline review: VA Pamphlet 26-7 Chapter 4, verified September 21, 2026.”
Common Lender DTI Overlays
The following tiers reflect common lender practice, not VA regulation. VA publishes no such tiers. They appear here because borrowers frequently encounter them and confuse them with VA rules.
| Back-End DTI | Typical Lender Requirements |
|---|---|
| 41% or below | Standard approval range for most manual-underwriting lenders. Clean payment history and stable income expected. |
| 41.01%–45% | Many lenders require at least one strong compensating factor (e.g., high residual income, significant liquid assets). |
| 45.01%–50% | Fewer lenders approve in this range. Multiple compensating factors and strong residual income expected. |
| Above 50% | Rare approvals. Most lenders cap manual underwriting at or below 50% DTI as their own overlay. |
These tiers are representative lender overlays, not VA guidelines. VA publishes no DTI tiers for manual underwriting. Source: industry practice. [Common lender overlay]
Payment Shock
VA instructs underwriters to compare previous and proposed shelter expenses. A large increase in housing cost — even when DTI is within guidelines — warrants additional scrutiny. VA does not publish a specific percentage threshold. [VA rule — Ch. 4, Topic 10e]
- If a borrower’s application shows little or no reserves and excessive obligations, it may not be reasonable to conclude that a substantial increase in shelter expenses can be absorbed. [VA rule — Ch. 4, Topic 10e]
- Example: Borrower A pays $1,500/month in rent and applies for a $2,850/month mortgage — an $1,350 increase. Borrower B pays $2,500/month in rent and applies for the same $2,850/month mortgage — a $350 increase. Both borrowers may have identical DTI ratios, but the reviewer sees materially different risk profiles. Borrower B has demonstrated capacity to handle a payment close to the proposed mortgage; Borrower A has not.
The Complete VA Compensating-Factor List
Compensating factors are the strengths that can offset marginal residual income or a debt-to-income ratio above 41%. VA lists them in Chapter 4, Topic 10d. Two rules that competitors often omit:
- Compensating factors cannot be used to compensate for unsatisfactory credit. A file with poor credit history cannot be rescued by strong reserves or high residual income alone. [VA rule — Ch. 4, Topic 10d]
- A compensating factor must logically offset the specific weakness in the loan. For example, significant liquid assets may compensate for a residual income shortfall, but long-term employment would not. [VA rule — Ch. 4, Topic 10d]
- Meeting basic program requirements is not a compensating factor. The fact that a borrower has sufficient assets for closing purposes, or meets the residual income guideline, is not a compensating factor. [VA rule — Ch. 4, Topic 10d]
The following list reproduces VA’s named compensating factors in the order they appear in Chapter 4, Topic 10d. The list is introduced with “include, but are not limited to.”
| # | Compensating Factor (VA’s wording) | Weakness It Can Offset |
|---|---|---|
| 1 | Excellent credit history | Marginal DTI, limited reserves |
| 2 | Conservative use of consumer credit | DTI above 41%, limited reserves |
| 3 | Minimal consumer debt | Marginal residual income |
| 4 | Long-term employment | Income stability concerns, recent job change |
| 5 | Significant liquid assets | Residual income shortfall, payment shock |
| 6 | Sizable downpayment | DTI, limited equity |
| 7 | The existence of equity in refinancing loans | LTV concerns on a refinance |
| 8 | Little or no increase in shelter expense | Payment shock, uncertain capacity |
| 9 | Military benefits | Income stability, disposable income |
| 10 | Satisfactory homeownership experience | Payment reliability concerns |
| 11 | High residual income | DTI above 41%, marginal reserves |
| 12 | Low debt-to-income ratio | Marginal residual income |
| 13 | Tax credits for child care | Effective income, residual income |
| 14 | Tax benefits of home ownership | Effective income, residual income |
Source: VA Pamphlet 26-7, Ch. 4, Topic 10d. List is quoted in VA’s published order. Verified September 21, 2026.
Manual Downgrade: When an AUS Approval Becomes a Refer
A Refer finding is not the only path to manual underwriting. VA’s documentation guidelines specify three situations where an Accept/Approve file must be manually downgraded to Refer during the verification process: [VA rule — Ch. 4, Topic 8, Table 5]
- Omitted debts with late payments: Direct verification of significant debts not on the credit report reveals more than one 30-day late payment in the past 12 months on any omitted debt.
- Mortgage late payments: Any mortgage debt with more than one 30-day late payment in the past 12 months.
- Past-due debt ≥90 days: If a mortgage or other significant debt was last updated 90+ days ago on the credit report and the current status is 90+ days past due.
When a downgrade occurs, the file is subject to all Refer documentation requirements, including the 24-month rental history verification, creditworthiness determination, and underwriter signature on VA Form 26-6393.
How Are Student Loans Counted in Manual Underwriting DTI
Student loan treatment follows Chapter 4, Topic 5f. The VA rule differs from FHA and conventional guidelines, and many lenders apply their own overlays on top of the VA baseline.
| Loan Status | VA Rule | Documentation |
|---|---|---|
| Deferred 12+ months beyond closing | No monthly payment needs to be considered. [VA rule — Ch. 4, Topic 5f] | Written evidence that the deferment extends at least 12 months past the VA loan closing date. |
| In repayment, or deferment ending within 12 months of closing | Use the greater of: (a) the payment on the credit report, or (b) 5% of the outstanding balance divided by 12 months. [VA rule — Ch. 4, Topic 5f] | If the credit report payment exceeds the threshold, use it. If below, a servicer statement (dated within 60 days of closing) is required to use the lower amount. |
| Income-driven repayment (IBR, REPAYE, SAVE) | If the plan continues for at least 12 months past loan closing, the reported payment may be used. Otherwise the threshold calculation applies. [VA rule — Ch. 4, Topic 5f; 2023 LGY Conference] | Evidence that the income-driven plan will continue for at least 12 months past closing. |
Source: VA Pamphlet 26-7, Ch. 4, Topic 5f; 2023 LGY Conference (Student Loans slide). Verified September 21, 2026.
A borrower has a $40,000 student loan balance. The threshold calculation: 5% of $40,000 = $2,000; $2,000 ÷ 12 = $167/month. If the credit report shows a payment of $200, the lender uses $200 (it exceeds the threshold). If the credit report shows $0 or $50, the lender uses $167 unless a servicer statement dated within 60 days of closing reflects the actual payment terms for at least 12 months past closing. [VA rule — Ch. 4, Topic 5f]
Overlay Alert
Some lenders use 0.5% or 1% of the balance as their student loan calculation — figures that come from FHA or conventional guidelines, not from the VA. If a lender quotes 0.5% or 1%, that is a lender overlay, not a VA rule. Borrowers with large student loan balances should confirm which calculation the lender uses before applying. [Common lender overlay]
Refer Documentation Checklist
A complete documentation package reduces back-and-forth, keeps the review on schedule, and gives the underwriter confidence that the financial picture is credible. On a Refer, the following items are required or expected:
- 24-month VOR: Rental history from the landlord, credit report, or cancelled checks [AUS documentation rule — Ch. 4, Topic 8, Table 5]
- Income documentation: Pay stubs (1+ month with YTD), W-2s or tax returns, telephone verification of current employment [AUS documentation rule — Ch. 4, Topic 8, Table 6]
- Asset statements: Bank and investment statements verifying liquid assets, reserves, and source of funds [VA rule — Ch. 4, Topic 4b]
- Credit explanations: Written explanations for derogatory credit items, with assessment of creditworthiness on VA Form 26-6393 [AUS documentation rule — Ch. 4, Topic 8, Table 5]
- Significant-debt verification: Direct verification for debts not on the credit report with monthly payments exceeding 2% of stable monthly income [AUS documentation rule — Ch. 4, Topic 8, Table 5]
- Bankruptcy/trustee documents: For active Chapter 13 — 12 months of trustee payment history and approval from the Trustee or the Bankruptcy Judge [VA rule — Ch. 4, Topic 7]
- Student loan statements: When the threshold rule requires them — servicer statement dated within 60 days of closing [VA rule — Ch. 4, Topic 5f]
- Federal debt/CAIVRS resolution: Documentation showing any federal debt is resolved or in a satisfactory repayment arrangement [VA rule — Ch. 4, Topic 6]
- Compensating-factor support: Evidence for every claimed compensating factor (reserve statements, employment verification, rent receipts, etc.)
Letters of explanation should be brief and factual: what happened, when, why, how it was resolved, and what has changed to prevent recurrence. Attach documentation so the reviewer can verify the narrative. Preempt questions by including VOR, reserve proof, and student loan documentation upfront.
No Credit Score or Thin Credit
VA does not use credit scoring and does not require a minimum number of tradelines. Absence of a credit history is not generally considered an adverse factor. [VA rule — Ch. 4, Topic 7; VA Credit Standards FAQ; 2023 LGY Conference]
For borrowers with no established credit history, the determination is based on the borrower’s payment record on alternative or nontraditional credit directly from the borrower or creditor. [VA rule — Ch. 4, Topic 7]
| Source | What It Documents | Typical Look-Back |
|---|---|---|
| Rent payments | Housing payment reliability | 24 months (on a Refer file) |
| Utility bills (electric, gas, water) | Consistent obligation management | 12–24 months |
| Auto insurance premiums | Recurring payment discipline | 12 months |
| Phone/internet service | Ongoing service obligation | 12 months |
| Child care payments | Regular financial commitment | 12 months |
Source: VA Pamphlet 26-7, Ch. 4, Topic 7 (Absence of Credit History). Look-back periods are representative lender practice for alternative credit verification.
Lenders who accept borrowers without a traditional credit score use these payment histories in place of a FICO score to evaluate creditworthiness. Non-traditional tradelines or scoring models may be used; VA does not require a specific scoring model or a minimum number of tradelines. [VA rule — 2023 LGY Conference]
Chapter 7, Foreclosure, Short Sale, and Credit Counseling
VA evaluates credit events individually. The fact that a bankruptcy, foreclosure, or short sale exists in a borrower’s history does not in itself disqualify the loan. [VA rule — Ch. 4, Topic 7]
| Event | More Than 2 Years Ago | 1–2 Years Ago | Less Than 12 Months |
|---|---|---|---|
| Chapter 7 bankruptcy (discharge date) | May be disregarded. [VA rule — Ch. 4, Topic 7] | Requires both: (1) consumer credit obtained and paid satisfactorily since discharge, and (2) cause was beyond borrower’s control (verified). [VA rule — Ch. 4, Topic 7] | Generally not possible to determine borrower is a satisfactory credit risk. [VA rule — Ch. 4, Topic 7] |
| Foreclosure (finalized date) | May be disregarded. [VA rule — Ch. 4, Topic 7] | Same two conditions as Chapter 7. [VA rule — Ch. 4, Topic 7] | Same as Chapter 7. |
| Short sale / deed-in-lieu | If payment history on the property was not affected before the short sale or deed-in-lieu and the borrower was voluntarily communicating with the servicer, a waiting period from the transfer date may not be necessary. [VA rule — Ch. 4, Topic 7] | ||
| Consumer credit counseling | With prior adverse credit: 12 months’ satisfactory payments and counseling agency approval. With good prior credit: participation is a neutral or positive factor. [VA rule — Ch. 4, Topic 7] | ||
| Bankruptcy + foreclosure (simultaneous) | Use the later of the discharge date or the transfer-of-title date to establish the beginning of re-established credit. [VA rule — Ch. 4, Topic 7; 2023 LGY Conference] | ||
Source: VA Pamphlet 26-7, Ch. 4, Topic 7; 2023 LGY Conference (Foreclosures/Chapter 7 and Short Sale/Deed-in-Lieu slides). Verified September 21, 2026.
In circumstances not involving bankruptcy, satisfactory credit is generally considered re-established after the borrower has made satisfactory payments for 12 months after the date the last derogatory credit item was satisfied. [VA rule — Ch. 4, Topic 7]
Can You Get a VA Loan During Active Chapter 13
VA guidelines allow favorable consideration for borrowers in an active Chapter 13 repayment plan. The requirements are specific: [VA rule — Ch. 4, Topic 7]
- The borrower must have satisfactorily made at least 12 months’ worth of the plan payments. [VA rule — Ch. 4, Topic 7]
- The Trustee or the Bankruptcy Judge must approve the new credit. [VA rule — Ch. 4, Topic 7]
- If the borrower has finished making all payments satisfactorily, the lender may conclude that the borrower has re-established satisfactory credit. [VA rule — Ch. 4, Topic 7]
- The trustee payment counts as a recurring monthly obligation in DTI, which can push the ratio above 41% and make compensating factors critical.
- A written explanation of what caused the bankruptcy and documentation showing current plan payments are required.
Overlay Alert
Very few lenders manual-underwrite active Chapter 13 cases on VA loans. Most add an overlay requiring full discharge. If a lender declines, ask whether the denial was based on a VA guideline or a lender overlay. If it was an overlay, another lender with different policies may approve the same file without any changes. [Network experience]
Federal Debt and CAIVRS
Federal debt is separate from the AUS finding and from bankruptcy status. The VA Credit Alert Interactive Voice Response System (CAIVRS) identifies borrowers with delinquent or defaulted federal debt. If a CAIVRS hit appears, the debt must be resolved or placed in a satisfactory repayment arrangement before the loan is eligible for VA guaranty. [VA rule — Ch. 4, Topic 6]
VA Form 26-6393 (Loan Analysis)
On a manually underwritten file, the lender completes VA Form 26-6393, which includes residual income calculations, DTI, and the underwriter’s overall credit analysis. Items 49 through 53 require the underwriter’s signature and certification that the loan is a satisfactory credit risk — this signature requirement is waived on Accept/Approve files but required on Refer files. The form was revised per VA Circular 26-23-04. [VA rule — Ch. 4, Topics 8b, 9, 10; 2023 LGY Conference]
Why an AUS Refer Is Not a Denial
A Refer finding is a risk classification. A denial is a credit decision with its own adverse-action requirements. VA’s underwriting standard calls for judgment, and the automated systems do not approve or disapprove loans — they merely determine a risk classification. It is still the lender’s underwriter’s decision whether to approve the loan. [VA rule — Ch. 4, Topic 8a]
Manual underwriting is a structured VA guideline path, not a backup plan. It exists because the VA recognizes that automated systems cannot evaluate every borrower’s full story. A complete documentation package with strong residual income, stable payment history, and credible compensating factors can support approval despite the score or credit event that triggered the Refer.
- Request the specific denial reason in writing — lenders are required to provide an adverse action notice explaining why.
- Determine whether the denial was based on a VA guideline limitation or a lender overlay. If it was an overlay, another lender may approve the same file.
- If DTI was the problem, reducing monthly obligations (paying off a car loan, consolidating card debt) can change the ratio enough to change the outcome.
- If credit history was the issue, a clean 12-month track record of on-time payments strengthens the file for the next submission.
If a borrower is denied, the first question is whether the denial was a VA guideline limitation or a lender overlay. Below-620 credit profiles are common in manual files, and overlay structures vary enough that the same file can be denied at one lender and approved at another. If the denial was due to insufficient residual income — a VA-level factor — the financial picture needs to change before reapplying anywhere. [VA rule — Ch. 4, Topic 10a]
How to Find a Lender Who Does Manual Underwriting
Availability varies. Many lenders apply overlays or do not offer manual underwriting at all. Finding the right lender is often the deciding factor in whether a Refer file gets reviewed.
- Ask the specific question: “Do you manual-underwrite VA loans, and what is your minimum score and maximum DTI for manual files?” If the loan officer cannot answer immediately, that lender likely does not offer it.
- Mortgage brokers with wholesale access often have fewer overlay restrictions and know which investors accept higher DTI, active Chapter 13, and Refer findings.
- Credit unions and community banks sometimes have portfolio flexibility but may not have VA-specific manual underwriting experience — confirm they have underwriters trained on VA Pamphlet 26-7.
- Avoid lenders who say they “might” be able to do it. Manual underwriting requires trained underwriters and an established process for handling additional conditions efficiently.
Our network includes loan officers who specialize in manually underwritten VA files. [Network experience]
Frequently Asked Questions
Can a VA loan go from approved to manual underwriting?
Yes. VA guidelines specify three downgrade triggers. If direct verification after an Accept/Approve reveals more than one 30-day late payment in 12 months on omitted debts, on any mortgage, or if a significant debt is 90+ days past due, the file must be manually downgraded to Refer. [VA rule — Ch. 4, Topic 8, Table 5]
What counts as a significant debt not on my credit report?
VA defines a significant unreported debt as one with a monthly payment exceeding 2% of stable monthly income for all borrowers. On both Refer and Accept/Approve files, the lender must obtain direct verification of these debts. On an Accept/Approve, discovering more than one 30-day late payment in 12 months on any such debt triggers a manual downgrade to Refer. [AUS documentation rule — Ch. 4, Topic 8, Table 5]
Is the 41% DTI a hard cap on VA manual underwriting?
No. VA’s 41% ratio is a guide, not a cap, and DTI is secondary to residual income in VA’s framework. A ratio above 41% requires closer scrutiny. If residual income exceeds the VA guideline by at least 20%, the additional supervisor sign-off requirement is removed. Most lender overlays set a hard ceiling between 45% and 50%. [VA rule — Ch. 4, Topic 10b]
How long after bankruptcy or foreclosure can a Veteran apply?
For Chapter 7 or foreclosure finalized more than two years ago, the event may be disregarded. Between one and two years, approval requires re-established credit and a documented cause beyond the borrower’s control. Within 12 months of discharge, it is generally not possible to establish satisfactory credit risk. Short sales and deeds-in-lieu may have no waiting period if payment history was unaffected. [VA rule — Ch. 4, Topic 7]
How are deferred student loans counted?
If the deferment extends at least 12 months beyond the VA loan closing date (with written evidence), no monthly payment is counted. If the deferment ends within 12 months of closing, the lender uses the greater of: the credit report payment, or 5% of the outstanding balance divided by 12 months. For a $40,000 balance, the threshold is $167/month ($40,000 × 5% ÷ 12). [VA rule — Ch. 4, Topic 5f]
Does the trustee or the judge approve new credit in Chapter 13?
Either one. VA’s Chapter 4 states that the lender may give favorable consideration if the borrower has satisfactorily made at least 12 months’ worth of the payments and “the Trustee or the Bankruptcy Judge approves of the new credit.” Approval from either satisfies the requirement. [VA rule — Ch. 4, Topic 7]
Can savings make up for bad recent credit?
No. VA explicitly states that compensating factors “cannot be used to compensate for unsatisfactory credit.” Significant liquid assets may compensate for a residual income shortfall, but they cannot cure a poor credit record. A borrower with unsatisfactory credit must re-establish satisfactory credit before compensating factors become relevant. [VA rule — Ch. 4, Topic 10d]
How long does VA manual underwriting take?
VA imposes no additional waiting period or processing timeline for manually underwritten files. With a complete documentation package and a lender experienced in manual files, it need not take longer than an automated approval. Incomplete files and additional review conditions can extend processing. [Network experience]
Can a borrower be approved with high DTI if residual income is strong?
VA does not publish a DTI cap. When DTI exceeds 41%, the file requires closer scrutiny. If residual income exceeds the VA guideline by at least 20%, the additional requirement of the underwriter’s supervisor co-signing the justification is removed. Above 50% DTI, most lenders decline as their own overlay. [VA rule — Ch. 4, Topic 10b]
Do all VA lenders offer manual underwriting?
No. Many lenders apply overlays or do not offer manual underwriting. Mortgage brokers with wholesale access and VA-specialty lenders are more likely to offer it. Ask directly about manual underwriting policies before applying. [Network experience]
What should letters of explanation include?
Be concise and factual: what happened, when, why, how it was resolved, and what safeguards prevent a repeat. Attach documentation so the reviewer can verify the narrative. Underwriters need facts — cause, resolution, and evidence of recovery.
Can a borrower apply with a different lender if denied?
Yes. A denial at one lender does not prevent approval at another. Overlays on credit score minimums, DTI caps, and reserve requirements vary significantly. If the denial was due to a lender overlay, another lender may approve the same file. If it was due to a VA-level factor like insufficient residual income, the financial picture needs to change first.
How We Researched This Page
Every VA rule statement on this page is cited to a specific topic in VA Pamphlet 26-7, Chapter 4 (Credit Underwriting), verified from the KnowVA publication on September 21, 2026. Lender overlays are identified and labeled separately. The VA Credit Standards FAQ and the 2023 VA Loan Guaranty Conference credit underwriting presentation were used as supplementary VA-hosted sources.