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VA Manual Underwriting Guidelines

If your lender is unable to get an automated underwriting approval, or if you’ve been turned down with no explanation, it’s possible that it’s your lender, and not you, who is not qualified.

VA Manual Underwriting Guidelines 2022

VA manual underwriting guidelines are designed to give an underwriter guidance and the guidelines for manually underwriting, and approving a loan application.

There are many lenders that simply do not manually underwrite VA loans. When choosing a lender, this is something that you want to research when you’re first applying for a VA loan.

A lender that has the experience of manually underwriting a VA loan can give you a second chance if the automated underwriting system decision comes back with a refer/eligible finding, or if certain conditions are present at the time of underwriting.

If you are applying for a VA guaranteed loan, choose a loan officer that has experience with VA loans, and more specifically, VA manual underwriting guidelines.

VA Manual Underwriting

There are many reasons why a VA manual underwriting downgrade can happen.  In some cases, it could be that your loan officer or underwriter did not structure your loan properly.

If your loan officer is inexperienced, or if their lender is not aggressive with underwriting their interpretation of the guidelines, your chances of receiving an automated underwriting decision significantly goes down.

What Is Manual Underwriting For A Mortgage?

Underwriters are the people who analyze your mortgage application, creditworthiness, and financial history to determine whether to approve you to receive a mortgage. This process is called underwriting. 

Underwriters typically use computer programs that automate much of the information gathering and analysis process. This process is called automated underwriting and is the easiest and fastest way to analyze and approve a mortgage.

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Automated underwriting works great if everything is simple and perfect on your loan and credit history. However, many people have extenuating circumstances that require further review. When those happen, the automated underwriting program flags the application as one requiring further investigation, the process known as manual underwriting. 

Manual underwriting is a less-automated, more time-consuming process. Many lenders, especially the ones you see advertising all over the place, or who buy your contact information after you input it into a form online, cut costs by simply rejecting loans that require manual underwriting. As a result, in many cases, people are denied a mortgage that could have been approved if the mortgage lender would have spent the extra time to manually underwrite their loan.

At FindMyWayHome.com we feel that’s just plain wrong, so we work with mortgage lenders who are willing to go to the mat and put in the extra time and effort to help people get their mortgages accepted. While we don’t succeed every time (some people’s situations can’t qualify them for a mortgage even when it’s manually underwritten,) we help thousands of people every year get approved for mortgages, many of whom have previously been denied.

System Override and Manual Downgrade

According to the VA Mortgage Underwriting Handbook, system override and/or manual downgrade of an Accept/Approve to a Refer classification may be required if a particular loan application variable is revealed during loan processing.

A system override occurs when something appears on the loan application that triggers a requirement that an underwriter review the loan file.

If your lender is not approved to or won’t take the extra time and effort to manually underwrite your VA loan, they’ll typically deny your application, even if you would have qualified through manual underwriting.

A manual downgrade becomes necessary if additional information, not considered in the AUS decision, affects the overall insurability or eligibility of a mortgage otherwise rated as an Accept or Approve.

Both system overrides and manual downgrades may be triggered by inaccuracies in credit reporting, by eligibility issues, when a case file cannot be documented according to the automated underwriting system findings, and for other reasons including the unlikely failure of the automated underwriting system to recognize a derogatory credit item.

Manual Downgrade – Credit Issues

Credit issues that appear in the file can trigger an automatic downgrade, and require your VA loan to follow manual underwriting guidelines.  Here are a few of the most common credit issues that will result in a manual downgrade.

VA Guidelines – Previous Mortgage Foreclosure:

A borrower whose previous residence or other real property was foreclosed on or has given a deed-in lieu of foreclosure within the previous two years is generally not eligible for an insured mortgage.

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There are some lenders that, with documented exceptions,  will manually underwrite the loan application and look for compensating factors if the foreclosure or deed in lieu occur less than 2 years before the application date.

Providing the foreclosure was completed at least two years previously and the risk-classification from the AUS is an Accept/Approve, no further documentation regarding the foreclosure is required.

Mortgage History VA Guidelines:

Late mortgage payments during the most recent 12 months consisting of greater than 1×30 days late on a purchase or a rate/term refinance, or greater than 0 x 30 on a cash out refinance.

VA Bankruptcy Guidelines:

Both Chapter 7 liquidations and Chapter 13 bankruptcies discharged within two years of loan application will require a manual downgrade. If your bankruptcy has been discharged less than one year is not eligible for a VA guaranteed mortgage.

Providing the bankruptcy was discharged at least two years previously and the risk-classification from DU is an Accept/Approve, no further documentation regarding the bankruptcy is required.

VA Guidelines – Disputed Accounts:

If your credit report reveals that there are any disputed credit accounts or public records, the mortgage application must be referred for manual underwriting review.

Derogatory Credit Letter Of Explanation

Some of the credit factors listed above require a Derogatory Credit Letter Of Explanation. This is a letter that explains the circumstances behind the credit issue, which, in combination with substantiating evidence, can help gain approval in a manual underwriting process.

Compensating Factors when Manually Underwriting A VA Loan

When manually underwriting your VA loan, the underwriter is doing a combination of things.  In some cases, the underwriter is only looking for alternative documentation to satisfy a requirement of the automated underwriting decision.

Compensating factors will allow an underwriter to “offset” credit profile deficiencies by documenting that there are sufficient conditions that reduce the risk of default.

Compensating factors may affect the loan decision.  These factors are especially important when reviewing loans which are marginal with respect to residual income or debt-to-income ratio.  They cannot be used to compensate for unsatisfactory credit.

Valid compensating factors should logically be able to compensate (to some extent) for the identified weakness in the loan.  For example, significant liquid assets may compensate for a residual income shortfall, whereas long-term employment would not.

Mortgage Compensating Factors

Compensating factors include, but are not limited to the following:

  • excellent credit history,
  • conservative use of consumer credit,
  • minimal consumer debt,
  • long-term employment,
  • significant liquid assets,
  • sizable downpayment,
  • the existence of equity in refinancing loans,
  • little or no increase in shelter expense,
  • military benefits,
  • satisfactory homeownership experience,
  • high residual income,
  • low debt-to-income ratio,
  • tax credits for child care, and
  • tax benefits of home ownership.

Don’t Take No For an Answer

If your lender is not approved to do VA manual underwriting on VA Guaranteed loans or is unwilling to do it, you may be told you’re not approved without further explanation or options.

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Should this happen, ask your lender if they are able to manually underwrite VA loans.  It’s much more work for the lender and the underwriter, and may require much more documentation from you, the borrower – but don’t take NO for an answer.

Find a lender that is willing to fight for you and manually underwrite your VA home loan.  We are out there and don’t mind working extra hard to qualify Veterans for home loans.

Have Questions About a Loan Denial Or Other Mortgage Issues?

We can help! You can Ask Your Question here and we will connect you with a Mortgage Expert in your area that can help, or you can find a Mortgage Expert Near You below this article.

About the Author

Scott Schang

A 20+ year veteran of the Mortgage and Real Estate industry, I am passionate about educating and empowering consumers. I have been writing about consumer protection issues and making sense of complicated real estate and mortgage topics on this website since 2007

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  • Jason says:

    Hi Scott,
    Need help finding someone that can help us get a VA loan with a reported 30-day late.

    • Scott Schang says:

      Jason, shoot me an email to scott@findmywayhome.com – a 30 day late should not be an issue. There are other factors that are considered as well, like you loan to value, debt to income and credit score.

      VA loans are very flexible. I’m sure you have a good explanation for the late, that will also be considered.

      Hope this helps?

      THANK YOU for your Service!