Passing a VA Manual Underwrite: A Comprehensive Guide for Veterans and Homebuyers

Refinancing or buying a home with a VA loan offers several benefits for eligible veterans, active-duty service members, and surviving spouses, including competitive interest rates, no down payment requirements, and relaxed credit score standards. However, when you apply for a VA loan, the application often undergoes an automated underwriting process through a system called Desktop Underwriter (DU). This automated system checks eligibility, creditworthiness, and ensures the borrower meets the VA’s requirements. But, in some cases, the loan application may be manually underwritten, which can feel more like a thorough investigation into your financial situation. If you’re facing manual underwriting for a VA loan, it’s important to understand the process, what to expect, and how to improve your chances of approval.

In this article, we’ll explore what manual underwriting is, how it differs from automated underwriting, why you may face manual underwriting, and the steps you can take to pass a VA manual underwrite.

What is Manual Underwriting?

Manual underwriting occurs when a human underwriter (usually a loan officer or a member of the lender’s underwriting team) evaluates your mortgage application instead of relying on an automated system. This process is typically used when the automated system cannot make an automated decision due to complex or non-standard factors, such as:

•Missing or insufficient credit history

•Recent derogatory credit events (such as a foreclosure, bankruptcy, or late payments)

•Non-traditional income sources

•Complex debt situations

•Unusual property or borrower situations that require closer inspection

In the case of a VA loan, manual underwriting is often required when the applicant’s financial situation does not neatly fit within the guidelines used by the VA’s automated systems or when the applicant has not been able to pass the automated credit check.

Why Does a VA Loan Go Through Manual Underwriting?

While many VA loan applications can be processed through automated underwriting, there are several reasons why your loan might be manually underwritten. Some common scenarios include:

1.Low Credit Scores: Although the VA does not set a minimum credit score requirement, lenders typically do. If your credit score is below the lender’s threshold (often 620-640), the loan application may be sent for manual underwriting. This allows the underwriter to manually assess your creditworthiness and look at your overall financial situation.

2.Recent Late Payments or Derogatory Credit Events: If you’ve had recent late payments, defaults, or other negative marks on your credit report, automated underwriting may not be able to approve your loan application. Manual underwriting allows the underwriter to review your credit history in more detail and make a decision based on factors like the cause of the late payments, how long ago they occurred, and whether you’ve re-established a positive payment history.

3.Insufficient Credit History: If you don’t have a long credit history or you’ve had trouble building credit due to life circumstances (e.g., you didn’t use credit cards, you were deployed for long periods, or you’re new to credit), your application may not pass automated underwriting. Manual underwriting lets the underwriter consider alternative credit information like rental history, utility payments, and employment stability.

4.Non-Traditional Income: If you have non-traditional sources of income, such as freelance work, self-employment, or irregular pay periods, it may be difficult for automated underwriting systems to evaluate your application. In such cases, manual underwriting can help the lender assess the consistency and reliability of your income.

5.Debt-to-Income (DTI) Issues: The VA guidelines recommend a Debt-to-Income (DTI) ratio of 41% or lower, but sometimes borrowers exceed this threshold due to high living costs, medical expenses, or other debt obligations. When the DTI ratio exceeds 41%, manual underwriting allows the underwriter to review the borrower’s full financial picture, including savings and compensating factors.

6.Previous Foreclosure or Bankruptcy: If you’ve experienced a foreclosure, bankruptcy, or short sale, the automated system might flag your application for manual review. VA loans typically require a two-year waiting period after a foreclosure and a two-year waiting period after a bankruptcy discharge before applying for a new loan. A manual underwriter can look at your specific situation and the circumstances around these events to make an exception if needed.

How Manual Underwriting Works

During a manual underwrite, an underwriter reviews a borrower’s entire financial situation, looking at factors such as:

1.Income and Employment: The underwriter will review your income documentation, such as pay stubs, tax returns, and bank statements. They will want to confirm that your income is consistent, stable, and sufficient to cover your mortgage payments.

2.Credit History and Explanation: The underwriter will look at your credit report in detail. They will also assess the reasons behind any late payments, defaults, or bankruptcies. If you have any derogatory credit events, you may be required to provide a letter of explanation and evidence that your credit issues have been resolved.

3.Assets and Savings: The underwriter will review your bank statements and other asset documentation to ensure you have sufficient funds for closing costs, reserves, and potential emergencies. VA loans do not require a down payment, but you may still need funds for other costs associated with the loan.

4.Compensating Factors: Lenders use compensating factors to mitigate risks for borrowers who have issues with credit or income stability. These might include:

•Large savings or liquid assets

•Significant equity in the home

•Strong rental history (particularly for first-time homebuyers)

•A history of paying off debt or taking proactive steps to improve financial stability

•Stable, long-term employment history

5.DTI Ratios: Although the VA typically prefers a 41% DTI ratio, manual underwriting may allow flexibility if other factors make your financial situation strong enough to handle higher debt payments.

6.Property Condition: The underwriter will also verify the property’s condition to make sure it meets VA requirements, including safety and livability standards.

Once the underwriter completes this detailed review, they will either approve or deny the loan application or request additional documentation. This process can take longer than automated underwriting, and it’s not uncommon for applicants to face additional requests for clarification or evidence.

Steps to Pass VA Manual Underwriting

1.Gather All Necessary Documentation: To ensure a smooth manual underwriting process, gather and organize all the required documentation early. This typically includes:

•Proof of income (e.g., pay stubs, tax returns, and bank statements)

•A detailed explanation of any recent late payments or credit issues

•Documentation of any compensating factors (such as large savings, additional assets, or a positive rental history)

•Verification of employment and income stability

•Proof of timely payments for non-traditional credit accounts (such as rent or utilities)

2.Be Prepared to Explain Negative Credit Events: If you have any derogatory marks on your credit report (late payments, bankruptcy, foreclosure), be ready to explain them. The underwriter will want to understand the circumstances surrounding the event (such as job loss or medical hardship) and see evidence that you’ve since corrected the issue. A well-written, honest letter of explanation can go a long way in the underwriting process.

3.Reduce Debt and Improve Your Credit Score: While it may not always be possible to eliminate all debt before applying for a VA loan, reducing your outstanding balances can improve your Debt-to-Income ratio and show that you are actively working on improving your financial situation. Paying down high-interest credit card balances and resolving old collections can help boost your credit score and improve your chances of passing manual underwriting.

4.Build Compensating Factors: If your credit score or DTI ratio are not ideal, focus on building compensating factors. These could include:

•Significant savings or assets that demonstrate you have the ability to cover your mortgage even in case of unexpected financial setbacks

•A stable and long-term job history or career in a growing field

•A strong rental history, especially for first-time homebuyers who may not have extensive credit histories

5.Work with a VA-Savvy Lender: Not all lenders are equally experienced in handling VA loans, particularly those that require manual underwriting. Work with a lender who has a track record of successfully processing VA manual underwrites. They can guide you through the process, provide advice on what documents are necessary, and help you structure your application in the best way possible.

6.Be Patient and Stay Organized: The manual underwriting process can be slow, especially if additional documentation is required. Respond promptly to any requests from your lender, keep track of deadlines, and be proactive in providing any needed information.

Conclusion

Navigating a VA loan through manual underwriting may feel daunting, but it’s not an insurmountable hurdle. Manual underwriting offers flexibility, allowing lenders to look beyond rigid credit scores or standard income requirements and consider the complete picture of your financial stability. By understanding why you might face manual underwriting, preparing thoroughly, and addressing any potential issues head-on, you can improve your chances of passing manual underwriting and securing your VA loan. If you’re committed to providing transparent documentation and demonstrating your ability to repay the loan, manual underwriting can work in your favor to help you achieve homeownership.