The world of VA loans, as ripe with business opportunities as it is, is still viewed by many originators as a niche space. That belief has led to a persistent lack of understanding of VA loans and what underwriting such agreements requires. A recent online panel discussion hosted by VA lender NewDay USA attempted to bring more clarity to the space and encourage originators to consider adding VA loans to their arsenal of products.
“Fundamentally,” NewDay COO Michael Oursler told attendees, “the difference between FHA and VA – often they’re lumped together as Ginnie Mae products – is that the FHA guidelines are extremely rigid and black and white, and the VA guidelines are not. And that’s intentional.”
Often, when returning from duty or after being discharged, veterans face a wealth of unique challenges that can leave them looking less than credit-worthy in the eyes of non-VA lenders. When overseas, service members are often unable to keep on top of their day-to-day banking, meaning mistakes in autopayments or transfers, or other notifications from creditors, can be missed. The transition from active duty to civilian life can lead to spikes in credit usage and missed payments. Military personnel are also frequent targets of fraud, which can leave them with significant financial messes to clean up once they’re back on American soil.
VA loans’ wide-ranging credit guidelines allow for each individual veteran’s situation to be taken into consideration; or, as stated in a frequently quoted line from Bill White, former assistant director of loan policy for the VA, “As long as lenders document their reasoning, it’s extremely unlikely VA staff would ever take issue with their decision.”
With the VA firmly on the side of veterans, making the case for them as borrowers isn’t too arduous a task. But the underwriting process does feature a few distinct components.
The first thing an originator must do is order a Certificate of Eligibility through the VA website. As Oursler explains, for most active duty military personnel, these eligibility checks take seconds. When the COE is delivered, the veteran’s entitlement amount – how much of the loan the VA will guarantee for its investors; the maximum is 25 percent – will also be disclosed.
“A lot of times, it’ll be the full amount,” Oursler says. “In cases where there’s less entitlement remaining, you’ll have to do a calculation to determine how much the VA will guarantee, and then compare that to your secondary investor’s guidelines.” In such circumstances, the borrower may need to put down a sufficiently large down payment to ease the investor’s nerves.
In determining a veteran’s residual income, originators will be required to calculate total gross income and then subtract estimated taxes, outstanding debts and utility/maintenance costs. Once residual income is known, it must be compared to the minimum level established by the VA, which is based on where the loan is being originated, the loan amount and the number of people living in the veteran’s household.
If an applicant’s debt-to-income ratio is over 41 percent, they may be required to earn as much as 120 percent of the VA minimum. That figure can be negotiated, but there are no cases where borrowers can get away with earning less than the minimum.
The appraisal process is at once simple and layered. The appraisals themselves can be ordered through the VA website. The VA contacts an approved appraiser, who must adhere to the agency’s fee and timeliness schedules.
Once the appraisal is complete, a Notice of Value must be issued. NOVs are essentially audits of the appraisal; not a second opinion on the value of the home, but a confirmation of the reasonableness of the initial appraisal process. The appraisal reviewer can be the employee of a lender if the lender is a LAPP (Lender Appraisal Processing Program) approved. If that’s not an option, a VA employee will complete the NOV, which could add a day or two to the process.
The Notice of Value requires the reviewer to take note of several things, from checks on wood destroying insects to rules around shared driveways. To reduce the overall cost for borrowers, the VA encourages reviewers to use photos when necessary, as in the case of completed repairs, to eliminate the need for re-inspections.
“The Notice of Value should only be what the VA is requiring,” Oursler advised. “If you want to condition for other things, that’s fine, but it doesn’t belong on this document.”
Past credit issues
The VA can be very forgiving when it comes to veterans who have experienced bankruptcy, foreclosure or a short sale. If a bankruptcy or foreclosure took place more than two years ago, it will be disregarded. If either event took place less than two years ago, but was the result of uncontrollable circumstances, it will receive favorable consideration. Borrowers can also strengthen their cases if they’ve re-established their credit by making consistent payments since their foreclosure or bankruptcy took place.
“The better you can do to document the story and show that they started to rebuild their credit quicker, the more likely the VA is to give you a positive viewing,” Oursler said.
Short sales are not looked at negatively if the intent to sell was communicated to the servicer or holder of the loan and payments were made on time before the sale occurred. If the VA incurred losses on one of these sales, however, it could impact the veteran’s entitlement levels the next time they apply for a VA loan.
Veterans occupy a unique position in American society, and their willingness to sacrifice has earned them an equally singular opportunity to own homes. The VA loan space may seem like a different world, but its common-sense approach to underwriting increases the likelihood of success for both veterans and the originators who serve them.