In the last chapter we went over the VA guarantee – what it is, why it’s great, and what it means to both lenders and borrowers. A great deal of important information was covered about the entire VA loan process, and more detail was gone into concerning the VA guarantee itself and the steps the lender must take to properly document a new VA loan and when the loan is paid-in-full. Chapter four of the VA Lender’s Handbook is all about the underwriting process. Initially, you might think that there’s not much that a borrower would want to know, but in fact, the chapter is a wealth of information that can help a borrower be properly prepared for the loan application process.
First we’re going to talk about income requirements on a VA loan and how different types of income can be verified. This is a very long section in the Handbook and will certainly take more than one article. To get started, let’s identify the underwriter’s objectives when it comes to identifying and verifying income. The underwriter’s goal is two-fold: the income needs to be sufficient, and it needs to be stable. The borrower must have income available to meet the mortgage payment, other shelter expenses (utilities), other debts and obligations they have, and family living expenses. Then, that income must be stable, reliable, and anticipated to continue during the foreseeable future. Verification of income is immensely important because only verified income can be considered in total effective income.
The Handbook takes a section to discuss the income of a spouse. For a spouse that will be contractually obligated on the loan, their income must be treated the same way as the veteran borrower’s income. The VA, however, is conscious of the Equal Credit Opportunity Act, and so instructs lenders not to ask questions about spousal income unless the:
• spouse will be contractually liable,
• applicant is relying on the spouse’s 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.
The applicant is not required to disclose any child support payments or alimony unless they want it to be considered as verified income for the purposes of the loan. Income sources cannot be evaluated as positive or negative as long as the income is stable and reliable. In other words, you cannot be penalized if some of your stable income comes from public assistance programs. So what are the steps to verifying income? It depends on the type of income. First, we’ll go over non-military employment.
The underwriter needs to verify the last two years of non-military employment history. Preferably, the applicant has been with the same employer for the last two years, but if this is not the case, then a two-year history of all employment is required. An explanation must also be provided that the borrower has not been with the same employer for the last two years. The different types of employment verification must be compared for accuracy (pay stubs, tax returns, etc.) and consistency. Acceptable forms of verification include the VA Form 26-8497 and a pay stub. The pay stub must be within 120 days of the loan closing date. VOEs (Verification of Employment) may be used as long as the agency providing them has been approved by the VA. The VOE used must be the original and not a copy – the pay stub may be a copy.
For DoD employees, a computer-generated paystub may be accessed through myPay. Other companies may provide electronic paystubs; those will generally need to be printed out. For borrowers that are employed in construction or other seasonal/climate-dependent work, the underwriter must also obtain documentation evidencing the applicant’s total earnings year to date, tax returns for the last two years, and if the applicant works out of a union, evidence of the union’s history with the applicant. There is even more information just on non-military employment income verification, which we will pick up in the following article.