In this article we will be focusing on the VA lenders handbook chapter 4, income requirements and verified income. 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.
Income Requirements and How They’re Verified
In the last article, we began discussing income verification for non-military employment. Since there is a great deal of different types of employment that fall under that category, it has been split into two articles. We have established that the underwriter needs to obtain a VOE and a pay stub to verify employment. The VOE can be accessed using VA Form 26-8497, and a pay stub can be provided by the borrower and will generally need to be a hard copy. The VOE must be an original and not a copy. However, the lender has some discretion on whether a borrower’s income can be considered stable and reliable, and if the lender determines that a borrower’s income qualifies, there are some alternative documents that can be provided to satisfy the VA’s requirements.
If the lender determines that the borrower’s income is stable and reliable (2 years employment is not required to reach this conclusion), alternative documentation can come in the form of pay stubs that cover the most recent 30-day period, W-2 forms for the previous 2 years, and telephone verification of the applicant’s current employment. The usage of this alternative documentation is conditional on all three of these alternative documents being provided. If the employer is not willing to verify the employment of the applicant or the applicant is unable to furnish W-2s or pay stubs, standard documentation must be used. Pay stubs and W-2s must either be originals or copies certified by the lender to be true copies of the originals.
The Handbook lists more details on what can be submitted in lieu of a VOE if the lender determines that the borrower’s income is stable and reliable. Documentation can be submitted via fax and the internet if necessary. Fax and internet documentation must consist of the same information contained in a standard VOE, clear identification of the employer and source of information, and the name and telephone number of a person who can verify faxed information. As you can tell, the VA is serious about verification. Verification of income helps prevent most applicants falsifying information and most lenders from making bad loans. The responsibility for ensuring the authenticity of documents rests with the lender.
Most faxed documents will have “banner” information provided at the top of each page of the fax while internet documents will have a header and footer information that can identify it. When printed, the web page should have the URL and the date and time printed at the bottom. Emails will have headers that include a timestamp, the sender, and receiver. The lender is advised to carefully view each document that is received via fax or the internet to make sure that there are no errors such as incorrect area codes, unreadable names, or unreadable or inaccurate income.
The Handbook reminds the lender that income analysis is not an exact science; it is a very subjective process that relies heavily on contextual data. Because of this, the lender is advised to evaluate each loan on a case-by-case basis using their judgment, common sense, and flexibility when warranted. The ultimate goal is to determine the borrower’s income is both sufficient and reliable for the foreseeable future. The tools a lender can use to help determine this are the applicant’s past employment record, the applicant’s training, education, and qualifications, the type of employment the borrower is in, and the employer’s confirmation of continued employment.
While 2 years with the same employer is certainly a positive indicator, it in and of itself is not always sufficient to conclude that the borrower will have a certainty of continued employment. The two-year minimum is not required and even if met, should be accompanied with other information that can indicate whether the borrower will be able to meet the demands of the mortgage for the foreseeable future. While the VA loan program is certainly more locked-down and strict than conventional mortgages, it still does its best to offer the flexibility that veterans need in order to get approved for loans. After all, if most veterans can’t qualify for the loans, then what’s the point of the VA loan program? The VA does its best to help as many veterans qualify for loans as possible.
Your Credit History and VA Loan Application
In the last article we began talking about your credit history, how it can affect your VA loan, and what the lender looks for on credit reports. We discussed specifically, the two types of credit reports that the VA will accept and that the lender should look for prior repayment history, and more specifically, previous rent or mortgage payment history. We also discussed borrowers with little or no credit history. In this article, we’ll focus on the rest of the things that lenders look for in a credit report.
Because of the Equal Credit Opportunity Act (ECOA), the borrower can request that the lender consider any accounts that are under their spouse’s name as long as it can be shown that the account contributes to the overall picture of the applicant’s creditworthiness. If the spouse is not going to be on the loan, and the borrower does not request that the account be considered for their own credit, the account will not be considered for the loan. In addition to this, the ECOA also prohibits lenders from using the credit information of a spouse who will not be contractually obligated on the loan unless the borrower is relying on child support or alimony from the spouse or if the loan is being originated in a community property state. For the most part, spouses co-sign on the loan so this won’t come up, but it is good to know your and your spouse’s rights in the event that you’d like to sign for a loan without your spouse co-signing.
We’re going to get into some sensitive information here: adverse data and how it is handled. On the one hand, this gives you as the borrower an inside look at how lenders will treat your credit, but it is crucial to remember (and it even says so in the Handbook itself), that what it said here is not legal advice, and is by no means comprehensive. Many scenarios exist that are not explicitly covered, and these guidelines are simply the VA’s guidelines. Most, if not all, lenders have their own rules and guidelines to follow in the case of adverse data on a credit report. With all that said, let’s get started.
For borrowers who have not had satisfactory credit in the past, but have been repairing it, a 12-month history of satisfactory payments in all debts is required for the VA to be comfortable with a lender considering the credit reestablished. The Handbook gives the following example: “…assume a credit report reveals several unpaid collections, including some which have been outstanding for many years. Once the borrower has satisfied the obligations, and then makes timely payments on subsequent obligations for at least 12 months, satisfactory credit is reestablished.”
So what about debts that have gone to collections? Isolated collection accounts do not necessarily have to be paid off as a condition for loan approval. DISCLAIMER: while the previous statement may sound absolutely amazing, the borrower needs to remember a few things. First, this is just as far as the VA is concerned; every lender will have their own policies in place in regards to collections accounts, and many of them will require the accounts to be paid off. Second, the word “isolated” means that among a sea of properly paid-off debts there may be one small rock of an unpaid medical bill that went to collections. Even if unpaid collections accounts will not prevent the borrower from loan approval, the accounts still need to be considered part of the credit history and contribute to the overall determination.
In the case where the borrower has a disputed account, the lender may consider a claim of the borrower unless the balance has been reduced to judgment. Important note for the borrower, any disputed accounts that have been reduced to judgment must be paid off – and if no repayment plan is in place and in the process of being executed before the lender discovers the account, paying off the accounts after the fact will not alter the unsatisfactory record of payment. In the next article, we’ll discuss bankruptcies in more detail and talk about foreclosures.