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VA Manual Underwriting, Lower Credit Scores, Easier Qualifying
VA Loan Approval
VA loan guidelines are uniform, written by the VA, and used by lenders to underwrite and approve/deny individual loan files. While the guidelines may be uniform, lender interpretation and risk tolerance can vary. It’s important to understand the VA’s role in the VA lending process.
The VA does not lend you money; it simply guarantees your lender against losses in the event you default. Lenders are expected to maintain a certain level of performance on these loans, known as the “compare ratio.”
This compares an individual lender’s level of default against other lenders. If your compare ratio runs too high, you risk losing the ability to write VA loans. Not to mention, the costs associated with a defaulted loan. While the VA insures the lender against losses, there are still costs above and beyond that the lender will incur.
Automated Underwriting Systems: DU and LP
Now that we’ve covered that… All lenders work off either Fannie Mae’s automated underwriting system, “DU,” or Freddie Mac’s version, “LP.” These systems are programmed uniformly across all lenders. They analyze the entire picture—credit, income, and assets—and render a simple “Approve” or “Refer” response.
If approved, as long as the information your lender entered into the system is accurate and substantiated by accompanying documentation, in most cases, you’re good to go. When you get a “Refer” response, that’s when you’ll find yourself in the gray area.
A “Refer” means your file doesn’t meet the risk tolerance of the automated underwriting system and must be manually reviewed, approved, or denied by an underwriter. The VA sets specific guidelines for how the file must be manually underwritten.
Key Compensating Factors for Approval
Having multiple compensating factors. Compensating factors are things that demonstrate financial strength, these include.
These guidelines include, but are not limited to:
- High residual income
- Stable employment history
- Significant reserves
- Low debt-to-income ratio
- Stable rental history (including minimal to no payment shock compared to your current housing payment)
- No recent lates or collections (excluding medical) within the last 12 months
This last item is where a lot of people get hung up. In many cases, the reason you’re failing the automated underwriting system is due to lower credit scores caused by relatively recent lates or collections.
VA Loan Eligibility Calculator
When Manual Underwriting Is Needed
This is where your loan officer can make or break whether or not you qualify, and how quickly. Experience in the mortgage business is key. Understanding how credit, income, and assets interact and knowing how adjusting these variables can improve the likelihood of an automated approval is essential.
Your loan officer should be able to quickly tell you whether you have a real shot at qualifying for a manual underwrite or if an automated approval is your best option.
Because manual underwriting is discretionary, working with a loan officer familiar with their bank’s risk tolerance—who preferably works with the same team of underwriters consistently—is ideal. Unfortunately, you lose this personal connection when working with larger institutions or call-center-type lenders.
When an FHA Loan May Be a Better Option
If all else fails, FHA loans can, in certain circumstances, be easier to qualify for than VA loans. There are two major differences between FHA and VA: FHA generally requires a 3.5% down payment, while VA loans typically do not require a down payment.
FHA also requires monthly mortgage insurance, whereas VA loans do not. For a $300k loan, mortgage insurance can add around $140 per month. While it’s never guaranteed that you’ll be able to refinance in the future, the plan would be to use the FHA loan to get into the home and, eventually, refinance into a VA loan to eliminate the monthly mortgage insurance.
The Bottom Line
In conclusion, while VA loan guidelines are standard, lenders have different risk tolerances and interpretations. The VA guarantees loans, but it’s ultimately up to the lender to decide whether to approve or deny.
Automated systems like DU and LP offer quick decisions, but if you get a “Refer,” manual underwriting kicks in, and factors like stable income and low debt become crucial.
This is where a good loan officer truly makes a difference. An experienced loan officer can guide you through the process and improve your chances of approval.
It’s always a smart idea to get a second opinion to ensure you’re exploring all your options.
FAQs About VA Loan Denials
Can I get approved by another lender if one lender has already declined me?
Absolutely, while VA guidelines are uniform, each lenders interpretation and risk tolerance is different. Getting a second opinion never hurts.
Does a manual underwrite change my interest rate?
While every lender is different and has their own internal pricing, most lenders base your interest rate off of your credit scores. Whether your file is an automated approval or manual underwrite in most cases, should not have any bearing on your interest rate.
If my only option for qualification is FHA, can I refinance to a VA loan in the future?
Yes, provided of course it makes sense to do so. While the elimination of the mortgage insurance refinancing from FHA to VA could be savings enough to justify the refinance, typically you want to be reducing your interest rate by at minimum a half of a percent as well.
Does manual underwriting take longer than an automated approval?
No, it should not change the time it takes your lender to determine your qualification.
If I don’t qualify will your lenders take the time to create a plan for me so I can qualify in the future?
Absolutely, in the event you do not qualify our network of lenders will take the time to explain why you are not eligible at the moment, and create a plan of action to put you in a better position to qualify in the future.
Does having my credit pulled by multiple lenders hurt my credit?
It depends, you’re entitled to as many mortgage related inquiries as you like inside of a 30 day period. Any mortgage inquiries within 30 days of the initial mortgage pull are all treated as one.
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