Navigating a VA Manual Underwrite with Low Credit: What You Need to Know

When it comes to securing a home loan through the U.S. Department of Veterans Affairs (VA), many veterans and active-duty service members assume they must have pristine credit to qualify. However, this is not always the case. The VA loan program is known for offering veterans and their families flexible, low-cost financing options, even for those with less-than-perfect credit. While most VA loans are processed through automated underwriting systems (AUS), there are circumstances where a VA loan can be manually underwritten—especially if your credit score is lower than what’s typically required by automated systems.

A manual underwrite allows a loan officer to bypass the standard automated underwriting process and evaluate your application based on a detailed review of your financial situation. This process can be especially helpful for veterans who have a low credit score but meet other financial criteria that demonstrate their ability to repay a loan.

This article explores what a VA manual underwrite entails, the factors that can impact your approval with low credit, and how you can improve your chances of approval when applying for a VA loan.

What is a VA Manual Underwrite?

A VA manual underwrite is a loan review process that allows a lender to manually assess a borrower’s ability to repay a loan, as opposed to relying on an automated system to make the decision. In a typical VA loan approval process, the automated underwriting system (AUS) evaluates your credit, income, assets, and other factors. If your loan is not approved by the AUS, the lender may choose to go with a manual underwrite, where a human underwriter steps in to review your financials in detail and determine whether you can handle the loan.

The decision to manually underwrite a loan is made by the lender, and it can happen for several reasons:

1.Credit Score: If your credit score is below the threshold required by the AUS, which is usually around 620 to 640, the lender may opt for a manual review.

2.Incomplete or Complex Credit History: If you have a credit history that is difficult to evaluate or has many issues (such as missed payments, collections, or other red flags), the lender may manually review the file.

3.Debt-to-Income (DTI) Ratio: If your DTI ratio is higher than what the AUS system is comfortable with, the underwriter may manually evaluate your ability to handle the loan.

A manual underwrite requires a thorough, case-by-case evaluation of your financials, including your income, debts, credit history, and the overall stability of your finances.

Why Would a VA Loan Require a Manual Underwrite?

While automated systems are typically designed to speed up the loan approval process, they aren’t always the best option for every borrower. Here are a few common reasons why your VA loan might require a manual underwrite:

1. Low Credit Score

VA loans are more flexible when it comes to credit score than many other loan types, and the VA itself does not set a minimum credit score requirement. However, individual lenders often set their own guidelines for credit scores. While most lenders will accept a credit score as low as 620, the automated underwriting system might require a higher score. If your credit score is below the automated threshold, the lender may manually assess your situation.

Manual Underwriting and Credit Scores:

•Lenders may accept scores as low as 500 to 580 with a manual underwrite, but this can vary depending on the lender’s specific policies.

•Even with a low credit score, other compensating factors (such as stable employment or a larger down payment) may allow you to qualify.

2. Non-Traditional Credit History

Many veterans have a limited or unconventional credit history, especially if they’ve lived overseas during military service or have primarily used cash for purchases. The AUS typically cannot assess these non-traditional credit histories, so lenders may opt to manually review the borrower’s financial situation.

For example, if you don’t have a traditional credit score due to a lack of credit accounts, you can use alternative documentation such as:

•Rental payment history

•Utility bills (e.g., phone, electricity, gas)

•Insurance payments

•Cell phone or internet service payments

3. High Debt-to-Income (DTI) Ratio

The DTI ratio is a key factor in both automated and manual underwriting. A higher DTI ratio suggests you might be stretching your finances too thin to comfortably take on additional debt. The VA has relatively flexible guidelines for DTI, but some lenders prefer that your total DTI ratio not exceed 41%.

If your DTI is higher than the lender’s limits, a manual underwrite may be necessary to evaluate whether your other financial strengths (such as a stable income, substantial savings, or assets) can help offset this concern.

4. Recent Bankruptcy or Foreclosure

While the VA allows veterans and active-duty service members to apply for a loan after a bankruptcy or foreclosure, some automated systems may flag these issues as red flags. In these cases, a manual underwrite is often required to assess your post-bankruptcy or post-foreclosure financial habits.

Considerations include:

•Whether the bankruptcy or foreclosure was discharged or settled.

•How long it’s been since the event occurred.

•How you’ve managed your credit and finances since then.

Factors That Affect Your VA Manual Underwrite with Low Credit

If your credit score is on the lower end or there are some blemishes on your credit history, there are several factors that underwriters will look at during a manual review to determine if you qualify for a VA loan:

1. Stability of Income

One of the most important factors in a manual underwrite is ensuring you have enough stable income to meet your monthly obligations. Lenders will closely examine your income sources, including:

•Employment history (a steady job or long-term employment is a positive factor)

•Military pension or disability payments (if applicable)

•Additional sources of income (e.g., rental income, alimony, child support)

The underwriter will look for a consistent history of income, ideally for the past two years, and verify that your income is sufficient to cover your monthly debts, including the new mortgage payment.

2. Down Payment and Cash Reserves

While VA loans do not require a down payment, offering a down payment—whether it’s a partial one or using a grant—can improve your chances of approval. A larger down payment may help offset concerns about your credit score or other financial issues. Similarly, having cash reserves or savings can also act as a compensating factor.

Cash reserves give lenders confidence that you can handle financial challenges should they arise after closing.

3. Compensating Factors

Lenders will also look for “compensating factors” that might make up for a lower credit score. These factors include:

•A larger-than-required down payment

•Low or no credit card debt

•A history of timely payments on other obligations (even if they aren’t reflected in the credit score)

•A long-standing history of employment or military service

•A stable housing history (e.g., consistent rental payments or living with family without issue)

4. Discretion of the Underwriter

Manual underwriting gives lenders more discretion in approving loans. This means that even with a low credit score, the underwriter can use their judgment to approve the loan if you demonstrate strong financial habits in other areas. However, this also means that the approval process may take longer, and the lender might ask for additional documentation to back up your claims.

How to Improve Your Chances of Approval with Low Credit

If you’re applying for a VA loan with a low credit score and anticipate a manual underwrite, there are several steps you can take to improve your chances of approval:

1.Provide Detailed Documentation: Ensure you have all necessary documentation to show your financial stability, including pay stubs, tax returns, rental history, utility bills, and any other relevant records.

2.Reduce Your Debt: Pay down high-interest debts like credit cards or loans to reduce your DTI ratio. This will show the lender that you’re actively working on managing your finances.

3.Save for a Larger Down Payment: If possible, save for a down payment or find other ways to lower the amount you’re borrowing. This will reduce the lender’s risk and increase the chances of approval.

4.Seek Help from a VA Loan Specialist: Working with a lender who specializes in VA loans can help you navigate the process, especially if your credit score is low. A specialist will understand how to present your case to the underwriter in the best light.

5.Get Professional Credit Counseling: If your credit score is low due to past financial difficulties, consider working with a credit counselor to help repair your credit before applying for the loan.

Conclusion

A VA loan with a manual underwrite is an option for veterans or active-duty service members who may have a low credit score but can still demonstrate the ability to repay the loan. While manual underwriting can be a more time-consuming process, it also offers more flexibility and the opportunity to showcase your overall financial situation.

If you’re in this situation, working closely with your lender, ensuring your documentation is thorough, and showing strong compensating factors can significantly increase your chances of success. The VA loan program is designed to make homeownership accessible to veterans and service members, even if your credit score isn’t perfect—so don’t give up on your homeownership dreams just yet.