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VA Loan Manual Underwriting Guidelines

Underwriting is one of the last but most important steps of the VA loan process. During this step, your VA loan lender will verify your financial information to ensure you are able to make your mortgage payments for the foreseeable future. Underwriters typically assess factors such as income, debts, employment history and credit reports.

Analyzing all that data could take a lot of time if performed by a human, which is why most lenders use an Automated Underwriting System (AUS). An AUS can quickly compile a borrower’s information and compare it to specific eligibility criteria. By using an AUS, VA lenders can help far more Veterans and service members use their VA loan benefit.

Unfortunately, many prospective VA borrowers become discouraged when their application is denied during the underwriting stage. While AUS programs are efficient, their criteria sometimes exclude applicants a lender would otherwise approve. That’s when VA manual underwriting comes into play.

What is VA manual underwriting?

Manual underwriting is when a human underwriter reviews your financial information rather than relying solely on an automated system. This approach allows for a more detailed assessment of an applicant's risk level. By the end of the manual review, the underwriter will decide to approve, deny or conditionally approve the application.

Conditional approval is a good sign that your VA lender will likely approve your mortgage application, but it isn't guaranteed. Your lender will most likely have stipulations requiring you to submit additional information and documentation, such as bank statements, pay stubs or supplemental tax returns.

VA Manual Underwriting vs. AUS

When you submit a loan application, it generally goes through an AUS first. This system quickly determines your eligibility based on preset criteria.

However, the AUS may only accept potential borrowers who fit neatly within their standard parameters. For unique loan scenarios, VA manual underwriting can save a borrower from being considered too risky.

You might require manual underwriting if:

  • You have little to no credit history
  • You've faced bankruptcy, foreclosure, short sale or deed-in-lieu of foreclosure in the past two years
  • You've had late payments or defaults on federal debts
  • You have had previous late mortgage payments

Although VA lenders perceive applications processed through manual underwriting as higher risk, it doesn't mean you will be automatically denied. However, you may encounter stricter requirements regarding debt-to-income ratio (DTI), credit score and financial documentation.

What is the max DTI on a VA manual underwrite?

Although certain lenders may evaluate candidates with a DTI ratio up to 60 or 65 percent on an AUS record, manual underwriting typically has a maximum DTI of about 45 to 50 percent. A higher DTI ratio may be considered if you meet VA compensating factors.

VA Manual Underwriting Compensating Factors

If you have a high DTI or demonstrate other financial risk factors, compensating factors can help improve your likelihood of approval. Typically, lenders look for a minimum of two compensating factors when assessing a high DTI ratio, but this can vary by case.

VA compensating factors include:

  • Consistent and timely debt payments
  • Minimal reliance on consumer credit
  • Low overall consumer debt
  • Long-term employment stability
  • High residual income
  • Military benefits
  • Low debt-to-income ratios
  • Healthy homeownership history
  • Absence of payment shocks
  • Offering a larger down payment
  • Possessing significant liquid assets

Don’t rely too heavily on compensating factors for VA loan approval. Some lenders can be particularly picky when it comes to assessing your financial risk.

What can I do to improve my chances of VA loan approval?

If you want to increase the likelihood of your VA loan being approved, consider making or increasing your down payment amount, reducing existing debts, elevating your credit score and working to build your cash reserves.

While facing a setback in the VA loan process can be disheartening, the VA manual underwriting guidelines can help you get back on track. Contact your VA loan officer if you think manual underwriting is an option for you.