VA Underwriting Guidelines 

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VA Income Guidelines

VA income guidelines use your income in two qualifying calculations: Residual Income and a Debt to Income Ratio.  Residual Income has more weight than DTI but both are major qualifying factors.  However, ... first you must determine what your qualifying gross income is.  Naturally it can be complicated.  We hope this page will help you understand what is and is not qualifying income.

Acceptable Income: Only verified income can be considered in total effective income.

Unacceptable Income: Income from employment with less than 12 month term (with exceptions-see EMPLOYMENT HISTORY below)

Employment History

Generally, employment less than 12 months is not considered stable and reliable. However, it may be considered stable and reliable if the individual facts warrant such a conclusion. Carefully consider:

  • The employers evaluation of the probability of continued employment, if provided, and 
  • Whether the applicants training and/or education equipped him or her with particular skills that relate directly to the duties of his/her current position. Generally this applies to skilled positions. Examples include nurse, medical technician, lawyer, paralegal, and computer systems analyst. 
  • If the probability of continued employment is high-based on these factors then the lender may give favorable consideration to including the income in total effective income. 

An explanation of why income of less than 12 months duration was used must accompany the loan submission. 

If the probability of continued employment is good, but not as well supported or employment will be terminated at some point in the future, which can be reasonably estimated, the lender may still consider the income of an applicant who has been employed at least 6 months to partially offset debts of 10 to 24 months duration. 

Determine the amount which can be used, based on such factors as: 

  • The employers evaluation of the probability of continued employment, if provided. 
  • The length of employment (for example, 10 months versus six months). 

Short-term employment in a present position combined with frequent changes of employment in the recent past requires special consideration to determine stability of income.

  • Analyze the reasons for the changes in employment. 
  • Give favorable consideration to changes for the purpose of career advancement in the same or related field. 
  • Favorable consideration my not be possible for changes with no apparent betterment to the applicant, and from one line of work to another. 

If the lender includes applicants income in effective income, an explanation must accompany the loan submission. 

Income from Overtime Work, Part-Time Jobs, Second Jobs and Bonuses

Generally, such income cannot be considered stable and reliable unless it has continued (and is verified) for 2 years. 

To include income from these sources in effective income the income must be regular and predictable. There must be a reasonable likelihood that it will continue in the foreseeable future based on its compatibility with the hours of duty and other work conditions of the applicant’s primary job, and how long the applicant has been employed under such arrangement. 

The lender may use this income, if it is not eligible for inclusion in effective income, but is verified for at least 12 months, to offset debts of 10 to 24 months duration. Include an explanation. 

Income from Commission

When all or a major portion of the applicants income is derived from commissions, obtain the following documentation:

Verification of employment or other written verification which provides: 

  • The actual amount of commissions paid year-to-date. 
  • The basis for payment (that is, salary plus commission, straight commission, or draws against commission). 
  • When commissions are paid (that is, monthly, quarterly, semiannually, or annually), plus 
  • Individual income tax returns, signed and dated, plus all applicable schedules for the previous two years (or additional periods if needed to demonstrate a satisfactory earnings record). 

Generally, income from commissions is considered stable when the applicant has obtained such income for at least two years.  Less than two years cannot usually be considered stable unless the applicant has had previous related employment and/or extensive specialized training. 

Less than one year can rarely qualify. In-depth development is required for a conclusion of stable income on less than one year cases.

Non Military Employment

Verify a minimum of two years employment. If the applicant has been employed by the present employer less than two years verify prior employment plus present employment covering a total of two years. 

Provide an explanation of why two years employment could not be verified. 

Compare any different types of employment verifications obtained (such as, Verification of Employment, pay stubs, tax returns, and so on) for consistency, and clarify any substantial differences in the data that would have a bearing on the qualification of the applicant. 

Acceptable Verification: 

  • VA Form 26-8497, Request for Verification of Employment (VOE) or any format which furnishes the same information as VA Form 26-8497, plus 
  • A pay stub if the employer normally provides one to the applicant. 
  • If the employer does not indicate the probability of continued employment on the VOE, the lender is not required to request anything additional on that subject. 
  • The VOE and pay stub must be no more than 120 days old (180 days for new construction). 
  • For loans closed automatically, the date of the VOE and pay stub must be within 120 days of the date the note is signed (180 days for new construction). 
  • For prior approval loans, the date of the VOE and pay stub must be within 120 days of the date the application is received by VA (180 days for new construction). 
  • The VOE must be an original. The pay stub may be an original or a copy certified by the lender to be a true copy of the original. 

Note: It is acceptable for the Department of Defense civilian employees to provide computer generated pay stubs accessed through myPay (formerly known as E/MSS-Employee Member Self Service).

Alternative Documentation:

Alternative documentation may be submitted in place of a VOE if the lender concludes that the applicants income is stable, reliable, and anticipated to continue during the foreseeable future; that is, if the applicants income qualifies as effective income. Two years employment is not required to reach this conclusion. Alternative documentation consists of:

  • Pay stubs covering at least the most recent 30-day period. Note: It is acceptable for Department of Defense civilian employees to provide computer generated pay stubs accessed through myPay (Formerly known as E/MSS-Employee Member Self Service. 
  • W-2 forms for the previous two years, and 
  • Telephone verification of the applicants current employment. 

Document the date of verification and the name, title, and telephone number of the person with whom employment was verified. 

If the employer is not willing to give telephone verification of applicants employment or the pay stubs or W-2 forms are in any way questionable as to authenticity, use standard documentation. Alternative documentation cannot be used. 

Pay stubs and W-2 forms may be originals or copies certified by the lender to be true copies of the originals.

Analysis:

Income analysis is not an exact science. It requires the lender to underwrite each loan on a case by case basis, using judgment common sense, and flexibility, when warranted. 

Analyze the probability of continued employment (that is, whether income is stable and reliable) by examining the applicants past employment record, applicants training, education, and qualifications for his/her position. 

Two years employment in the applicants current position is a positive indicator of continued employment. It is not a required minimum and not always sufficient by itself to reach a conclusion on the probability of continued employment. 

Active Military Income and Recent Discharge or Voluntary Separation

A military LES (Leave and Earnings Statement) is required instead of a VOE (VA Form 26-8497).  The LES must furnish the same information as a VOE. 

The LES must be no more than 120 days old (180 days for new construction). 
For loans closed automatically, the date of the LES must be within 120 days of the date the note is signed (180 days for new construction). 

For prior approval loans, the date of the LES must be within 120 days of the date the application is received by VA (180 days for new construction). 

The LES must be an original or a copy certified by the lender to be a true copy of the original. Note: The Department of Defense provides service members access to a computer generated LES through myPay (formerly E/MSS) This type of LES is acceptable. 

In addition, identify service members who are within 12 months of release from active duty or end of contract term. Find the date of expiration of the applicants current contract for active service on the LES (for an enlisted service member) or on an officers orders. 

For a National Guard or Reserve member, find the expiration date of the applicants current contract. 

Additional Requirements

If the date is within 12 months of the anticipated date that the loan will close, the loan package must also include one of the following four items, or combinations of items, to be acceptable:

  • Documentation that the service member has already re-enlisted or extended his/her period of active duty to a date beyond the 12 month period following the projected closing of the loan, or 
  • Verification of a valid offer of local civilian employment following the release from active duty. 
  • All data pertinent to sound underwriting procedures (date employment will begin, earnings, and so on) must be included, or 
  • A statement from the service member that he/she intends to reenlist or extend his/her period of active duty to a date beyond the 12 month period, plus a statement from the service members commanding officer confirming that: the service member is eligible to reenlist or extend his/her active duty as indicated, and the commanding officer has no reason to believe that such reenlistment or extension of active duty will not be granted , or 

Documentation of other unusually strong positive underwriting factors, such as: 
A down payment of at least 10 percent, significant cash reserves, and clear evidence of strong ties to the community coupled with a nonmilitary spouses income so high that only minimal income from the active duty service member is needed to qualify. 

Reserves or National Guard Income

Income derived from service in the Reserves or National Guard may be included in effective income if the length of the applicants total active and Reserve/Guard service indicates a strong probability that the Reserve/Guard income will continue. 

Otherwise, this income may be used to offset obligations of 10 to 24 months duration. 

Recently Activated Reservist or Guard

Lenders must ask every applicant, whose income is being used to qualify for a loan, if their income is subject to change due to participation in a reserves/national guard unit due to activation.

To accomplish this, lenders must obtain a statement, which affirms that a veteran-applicant's status relative to membership in the Reserves or National Guard, has been ascertained and considered. This statement should be made part of the origination package and should be submitted to VA in the event the loan is selected for full review. 

When the answer is yes, lenders must determine what the applicant's income may be if activated: 

  • Reduced, carefully evaluate the impact the reduction may have on the borrower's ability to repay the loan. 
  • Increased, consider the likelihood the income will continue beyond a 12 month period. 

Example, if an activated reserve/guard member applies for a loan, they may present orders indication their tour of duty is not exceed 12 months. Under these circumstances lenders need to carefully evaluate both the present income (current employment) and expected income (reservist income) in terms of income stability and reliability. 

There are no clear-cut procedures that can be applied to all cases. Evaluate all aspects of each individual case, including credit history, accumulation of assets, overall employment history, etc... and make the best decision for each loan regarding the use of income in qualifying for the loan. 

It is very important that loan files be carefully and thoroughly DOCUMENTED, including any reasons for using or not using reservist income in these situations. Weight the desire to provide a veteran their benefit with the responsibility to ensure the veteran will not be placed in a position of financial hardship. 

Military Quarters Allowance

To use a military quarters allowance in the underwriting analysis, obtain DD Form 1747, Status of Housing Availability, indicating that item b (Permanent) or item d of that form applies. This form serves as notice that Quarters will not be made available to the applicant, and the applicant is authorized to make permanent arrangements for nonmilitary housing. 

Note: DD Form 1747 is not required in either of the following circumstances: 

  • When the applicants duty assignment clearly qualifies the applicant for quarters allowance. Examples include personnel stationed overseas whose families remain stateside, recruiters on detached duty, and military personnel stationed in areas where no on-base housing exists. 
  • When VA has established that the waiting lists for on-base housing in a particular geographic area are so long that it is improbable that individuals desiring to purchase off-base housing would be precluded from doing so in the foreseeable future. 
  • When VA issues a release to all lenders in the jurisdiction to inform them of its determination. 

Include an explanation with the loan submission of the circumstances justifying omission of the form. 

Analysis: The lender may include a military quarters allowance in effective income if properly verified. In most areas there will be an additional variable housing allowance, which can also be included.

The military quarters and variable housing allowances are not taxable income. 

Ensure that the applicant meets the occupancy requirements. 

Subsistence and Clothing Allowances

Any subsistence (rations) and clothing allowances are indicated on the LES.

Analysis: The lender may include verified allowances in effective income. These allowances are not taxable income. 

Note: The clothing allowance generally appears on the LES as an annual amount. Convert it to a monthly amount for the loan analysis.

Other Military Allowances

To consider a military allowance in the underwriting analysis, obtain verification of the type and amount of the military allowance, and how long the applicant has received it.

Analysis:  Examples include pro-pay, flight or hazard pay, overseas pay and combat pay. 

All of these are subject to periodic review and/or testing of the recipient to determine continued eligibility. These types of allowances are considered taxable income by the IRS, unlike housing, clothing and subsistence allowances. 

Military allowances may be included in effective income only if such income can be expected to continue because of the nature of the recipients assigned duties. Example: Flight pay verified for a pilot. 

If duration of the military allowance cannot be determined, this source of income may still be used to offset obligations of 10 to 24 months duration. 

Recently Discharged Veterans

Income: Obtain verification of any of the following that apply:

  • Employment income. 
  • Retirement income, and 
  • Military separation payments. 
  • If the applicant has been employed in a position for only a short time, obtain a statement from the employer that the applicant is performing the duties of the job satisfactorily and the probability of continued employment is favorable. 

Analysis: Cases involving recently discharged veterans often require the underwriter to exercise a great deal of flexibility and judgment in determining whether the employment income will continue in the foreseeable future. This is because some veterans may have little or no employment experience other than their military occupation. 

Continuity of employment is essential for a veteran with no retirement income or insufficient retirement income to support the loan obligation. 

For recently discharged veterans who have been in their new jobs only a very short time, analyze prospects for continued employment as follows: 

  • If the duties the applicant performed in the military are similar or directly related to the duties of the present position, use this as one indicator that the employment is likely to continue. 
  • If the applicants current job requires skills for which the applicant has had no training or experience, greater time in the current job may be needed to establish stability. 
  • If the applicants retirement income, compared to total estimated shelter expense, long-term debts and family living expense, is such that only minimal income from employment is necessary to qualify from the income standpoint, resolve doubt in favor of the applicant. 

Qualifying short-term employment - An applicant who was an airplane mechanic in the military is now employed as an auto mechanic or machinist. 

Non-qualifying short-term employment - An applicant who was an Air Force pilot is now employed as an insurance salesperson on commission. 

Most cases fall somewhere between these extremes. Fully develop the facts of each case in order to make a determination. 

Voluntary Separation Payments

Two types of voluntary separation payments are used to facilitate military downsizing:

  • Special Separation Benefit (SSB). A one-time lump sum. Taxable in the year received. Treat the same as any substantial cash reserve, and 
  • Voluntary Separation Incentive (VSI). Annual payments. Taxable in the year received. Include in effective income. Calculated by multiplying the veterans years of service times two. Requires a minimum of six years service (equates to a minimum of 12 years annual payments). 

If the veteran receives both VSI and VA disability compensation payments, the VSI is reduced by the amount of disability compensation. 

However, if the disability compensation is related to an earlier period of service and the VSI a later period of service, the VSI is not reduced by the amount of disability compensation. 

VSI is reduced by the amount of any base pay or compensation a member receives for active or reserve service, including inactive duty training. 

The veteran can designate a beneficiary for VSI payments in the event of death. 

Base Pay Analysis:

Consider the applicants base pay as stable and reliable except if the applicant is within 12 months of release from active duty. Analyze the additional documentation submitted. 

If the applicant will not be re-enlisting, determine whether: the applicants anticipated source of income is stable and reliable, and/or unusually strong underwriting factors compensate for any unknowns regarding future sources of income. 

Grossing Up Fixed Income

Tax-free income may be “grossed up” for purposes of calculating the debt-to-income ratio only (not residual income). This is a tool that may be used to lower the debt ratio for veterans who clearly qualify for the loan. 

“Grossing up” involves adjusting the income upward to a pre-tax or gross income amount which, after deducting state and Federal income taxes, equals the tax-exempt income. 

Use current income tax withholding tables to determine an amount which can be prudently employed to adjust the borrower’s actual income. Do not add non-taxable income to taxable income before “grossing up.” 

Tax-free income includes certain military allowances, child support payments, workers’ compensation benefits, disability retirement payments and certain types of public assistance payments. Verify that the income is indeed tax-free before “grossing up.” 

Income of a Spouse

Always inform the applicant (and spouse, if applicable) that they do not have to divulge information on the receipt of child support, alimony, or separate maintenance, however, in order for this income to be considered in the loan analysis, it must be divulged and verified. 

Income cannot be discounted because of sex, marital status, age, race, or other prohibited bases under the Equal Credit Opportunity Act (ECOA). 

Treat income from all sources equally; that is, the fact that all or part of an applicants income is derived from any public assistance program is not treated as a negative factor, provided the income is stable and reliable. 

Verify and treat the income of a spouse who will be contractually obligated on the loan the same as the veterans income. 

To ensure compliance with the Equal Credit Opportunity Act (ECOA), do not ask questions about the income of an applicants spouse unless the: 

  • Spouse will be contractually liable. 
  • Applicant is relying on the spouses income to qualify. 
  • Applicant is relying on alimony, child support, or separate maintenance payments from the spouse or former spouse, or 
  • Applicant resides in a community property state or the security is in such a state. 

Note: In community property states, information concerning a spouse may be requested and considered in the same manner as for the applicant, even if the spouse will not be contractually obligated on the loan.

Trailing Spouse income is Not allowed

Rental Income for Multi-Unit Property Securing the VA Loan 

Verification: Cash reserves totaling at least 6 months mortgage payments (principal, interest, taxes, and insurance - PITI), and Documentation of the applicants prior experience managing rental units or other background involving both property maintenance and rental. 

Analysis: Include the prospective rental income in effective income only if: Evidence indicates the applicant has a reasonable likelihood of success as a landlord, and Cash reserves totaling at least six months mortgage payments are available. 

The amount of rental income to include in effective income is based on 75 percent of: Verified prior rent collected on the units (existing property), or The appraisers opinion of the property's fair monthly rental (proposed construction). 

Note: A percentage greater than 75% may be used if the basis for such percentage is adequately documented.

Rental Income of the Property Applicant Occupied Prior to the New Loan

Obtain a copy of the rental agreement on the property, if any. 

Use the prospective rental income only to offset the mortgage payment on the rental property and only if there is no indication that the property will be difficult to rent. 

This rental income may not be included in effective income.

Obtain a working knowledge of the local rental market. If there is no lease on the property, but the local rental market is very strong, the lender may still consider the prospective rental income for offset purposes. 

Rental Income of Other Property Not Securing the VA Loan

Documentation of cash reserves totaling at least three months mortgage payments (principal, interest, taxes, and insurance - PITI) and Individual income tax returns, signed and dated, plus all applicable schedules for the previous 2 years, which show rental income generated by the property. 

Analysis:

Rental income verified as stable and reliable may be included in effective income. If there is little or no prior rental history on the property, make a determination based on review of:

  • Documentation of the applicants prior experience managing rental units or other background involving both property maintenance and rental. 
  • Any leases on the property, and 
  • The strength of the local rental market. 

Property depreciation claimed as a deduction on the tax returns may be included in effective income. 

Alimony/Child Support

Must comply with ECOA. Verify the income if the applicant wants it to be considered. The payments must be likely to continue in order to include them in effective income. 

Factors used to determine whether the payments will continue include, but are not limited to: 

  • Whether the payments are received pursuant to a written agreement or court decree. 
  • The length of time the payments have been received. 
  • The regularity of receipt, and 
  • The availability of procedures to compel payment. 

Non-Traditional Income

If it is reasonable to conclude that other types of income will continue in the foreseeable future, include it in effective income. Otherwise, consider whether it is reasonable to use the income to offset obligations of 10 to 24 months duration. 

Other types of income which may be considered as effective income include, but are not limited to: 

  • Pension or other retirement benefits. 
  • Disability income. 
  • Dividends from stocks. 
  • Interest from bonds, savings accounts, and so on, and 
    Royalties. 

The lender may include verified income from public assistance programs in effective income if evidence indicates it will probably continue for three years or more. 

Do not include temporary income items such as VA educational allowances and unemployment compensation in effective income. 

Seasonal Income

If unemployment compensation is a regular part of the applicants income due to the nature of his or her employment (for example, seasonal work), it may be included.

Foster Care

The lender may include verified income received specifically for the care of any foster child(ren.)  Generally, however, foster care income is to be used only to balance the expenses of caring for the foster child(ren) against any increased residual income requirements. 

Workman's Comp

The lender may include verified workers compensation income that will continue in the foreseeable future, if the veteran chooses to reveal it.

Automobile or Similar Allowances

Generally, automobile allowances are paid to cover specific expenses related to an applicants employment, and it is appropriate to use such income to offset a corresponding car payment. However, in some instances, such an allowance may exceed the car payment. 

With proper documentation, income from a car allowance which exceeds the car payment can be counted as effective income.  Likewise, any other similar type of allowance which exceeds the specific expenses involved may be added to gross income to the extent it is documented to exceed the actual expense. 

Income Tax and Social Security Deductions

Determine the appropriate deductions for Federal income tax and Social Security using the Employers Tax Guide, Circular E, issued by the Internal Revenue Service. Determine the appropriate deductions for state and local taxes using similar materials provided by the states. 

The lender may consider the applicants potential tax benefits from obtaining the loan (for example, mortgage interest deduction) in the analysis. To do so, Determine what the applicants withholding allowances will be, using the instructions and worksheet portion of IRS Form W-4, Employees Withholding Allowance Certificate, and apply that withholding number when calculating Federal and state income tax deductions. 

Income Tax Credits from Mortgage Credit Certificates

Mortgage Credit Certificates (MCCs) issued by state and local governments may qualify a borrower for a Federal tax credit. The Federal tax credit is based on a certain percentage of the borrowers mortgage interest payment. 

Lenders must provide a copy of the MCC to VA with the loan package which indicates: the percentage to be used to calculate the tax credit, and the amount of the certified indebtedness. 

The certified indebtedness can be comprised of a loan incurred by the veteran to acquire a principal residence or a qualified home improvement or rehabilitation loan. 

If the percentage on the MCC is more than 20%, there is an annual limit on the tax credit equal to the lesser of $2,000 or the borrowers maximum tax liability. 

Calculate the tax credit by applying the specified percentage to the interest paid on the certified indebtedness. Then apply the annual limit. 

Example:

The MCC shows a 30 percent rate and $100,000 certified indebtedness.

The borrower will pay approximately $8,000 in annual mortgage interest. 

Borrowers estimated total Federal income tax liability is $9,000. 

Calculate the tax credit as follows: 

  • 30% of $8,000 = $2,400. 
  • Apply the annual $2,000 limit. 
  • The tax credit will be $2,000. 
  • Use $167 (one-twelfth of $2,000) in the monthly analysis. 

Note: If the mortgage on which the borrower pays interest is greater than the amount of certified indebtedness, limit the interest used in the tax credit calculation to that portion attributable to the certified indebtedness.

 

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