If you have applied for a VA mortgage, chances are that the scenario was run through an automated system. These days mortgage lenders use Automated Underwriting Systems (AUS) for preapprovals for about every type of loan. Obviously, not all loans get approved. But even if a borrower does not get an automated approval, there is still a chance of using VA manual underwriting to get loan approval. Examples of automated underwriting systems used by lenders include:
Although DU and LP are Fannie and Freddie systems, they are both used for VA loans. Then, lenders and investors decide if they will use DU, LP, or both for loan scenarios. GUS, Guaranteed Underwriting System, is only used for USDA loans. It is not used for VA.
What do Automated Underwriting Systems Do?
When you hear a lender tell you that the loan is preapproved, that normally means an AUS has provided an acceptance for the scenario input. The systems use the credit report and the information provided from the loan application. Then, preapprovals are only as good as the data that has been input. For instance, if a loan officer does not ask enough questions, there could be incomplete or inaccurate data. Additionally, if the borrower does not provide enough relevant information to the loan officer, then the AUS approval could be false. So, preapprovals are just what they say and that is, based on the information known at this time it appears the loan could work. Ultimately, it is important to take the loan from preapproval stage to fully documented and approved as quickly as possible.
“Correct information up-front = more accurate VA preapprovals!”
Another purpose of automated underwriting systems is that they provide a stipulations list that a lender must obtain in order for the Veterans Administration to back the loan. The results of these systems can vary widely and typically the documentation requirements depend on the file type and risk for the scenario. For instance, high credit scores with low debts compared to income, and great monetary assets would typically require less documentation. Conversely, if a scenario is not as strong then the AUS findings may ask for more documentation. Furthermore, if the scenario has too many risk factors, it may come back as what is called a “refer”. If a file receives a refer, it means that the file must be manually underwritten.
VA Manual Underwriting Helps Military & Veteran Buyers
So, not everyone’s credit is perfect. Although many scenarios that may have a lower credit score, higher debt ratio, or other risk factor, it is often possible to get an automated preapproval. But, for borrowers that get a refer, a VA manual underwriting may help. First of all, not all VA lenders offer manual underwriting. The good news is that we do! In addition, where some lenders only use DU or LP for VA preapprovals, we can use either one. Sometimes that helps as one AUS may approve the file where the other does not.
If a file must go through manual underwriting, there is also a maximum debt ratio. The standard maximum debt ratio for VA manual underwriting is 41%. But, with compensating factors VA borrowers may get approved up to 43%! When we say maximum VA debt ratio, keep in mind that this is the debt ratio accounting for all monthly payments plus it is for VA manual underwritten file. Automated approvals may potentially go much higher into the mid 50’s percentage.
“With compensating factors, VA borrowers may get approved up to 43%!”
Compensating Factors Help VA Manual Underwriting Files
Not everything is cut and dry in lending, so there are times where compensating factors can make the difference. It can even make a difference in going from a denial to approval. So, if a borrower has a lower credit score or other elevated risk, these factors could help.
- Verifiable on-time rent history
- Asset reserves – assets left over after the loan
- Extended time on job
- High residual income – net monthly income after expenses
- Strong explanation for previous issue
- Isolated credit issue
Although a VA manual underwriting file will typically require lower debt to income ratios like mentioned above, these benefits mentioned can make a huge difference.