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VA Guidelines - Manual Underwriting

VA Guidelines – Manual Underwriting

Second Chance

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 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.

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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.

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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.

System Override and Manual Downgrade

A 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.

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.

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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.

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 occurs in less than 2 years from 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:  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.

Bankruptcy:  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.

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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.

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.

Compensating Factors

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.

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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.

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, you may be told you’re not approved without further explanation or options.

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.

Getting Your Questions Answered

All lenders are not created equal.  Most of the readers that find this site because they’ve been researching solutions to challenges, and have been told 10 different things by 10 different loan officers.

We’ve created this resource to help you sift through the endless opinions and articles that may, or may not directly answer your question correctly.

There are several ways to ask questions, and get expert opinions on this website.

  • Submit a Question:  On the bottom of this page, you’ll see a prompt that allows you to ask questions.  These questions come directly to me and are answered very quickly.
  • Leave a Comment:  Below every article is the option to leave a comment or question.  We see these comments and questions in real-time and the always answered, usually pretty quickly.

In addition to researching your questions and providing you with expert advice, I can also introduce you to a lender friend that I know has experience with your specific situation and can help.


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

Leave a Question or Comment About this Topic

  • Matt Mihill says:

    Hello Scott I’m really trying to purchase a home at this time if possible. Problem is I still at least a year before 2 years has passed since doing a lieu in deed. I’m hoping if I can find a good VA LOAN specialist and doing a manual underwriting maybe this could work. My credit is good as well as debt to income ratio. Wondering if you might be able to connect me with someone that could help ?


    • Scott Schang says:

      Hi Matt, I can absolutely introduce you to someone that specializes in VA guidelines. It might be a challenge getting an approval in less than 2 years from a Deed in Lieu, that’s not really one of the problems that can be solved with manual underwriting. Depending on the situation that led to the DIL, and your ability to show that you’re in a better place now, it’s worth a shot!

      Shoot me an email to scott@findmywayhome.com and let me know what State you’re in!

      THANK YOU for your Service! I hope this helps?

  • Kris says:

    During COVID, I went into forbearance on my current home loan. The account is out of forbearance as of December 10th, and I will submit my first regular payment on January 1st.

    I am in the process of purchasing a new home using a VA loan. The mortgage lender claims that I must have three months of regular payments before I can use a VA loan. I do not think that information is accurate based on guidance published by the VA on June 30, 2020, entitled “Impact of CARES Act Forbearance on VA Purchase and Refinance Transactions.”

    I have excellent credit (815), low consumer debt, and a stable income. What is your opinion?


    • Scott Schang says:

      Hi Kris, the 3 monthly payments is a guildeline that is required if you are using a Conventional or FHA loan to purchase the new home, but not VA. Pargraph 5 on this circular explains this.

      It is possible that your lender is using the 3 payments as an “overlay” and is choosing to use more strict guidelines than what is allowed by VA. A lot of companies do this.

      If you would like me to introduce you to a VA specialist that will follow the guidelines, shoot me an email to scott@findmywayhome.com and let me know what State you’re buying in.

      I hope this helps? And Thank You for your Service!

      Here is the paragraph for future reference:

      5. VA-guaranteed Purchase and Cash-out Refinance Loans. Veterans who are affected by COVID-19 should still be afforded the opportunity to utilize their earned VA home loan benefits. For this reason, VA is temporarily relaxing certain credit underwriting policies for VA-guaranteed purchase and cash-out refinance loans. While lenders must continue to follow VA’s underwriting standards generally, lenders should not use a CARES Act forbearance as a reason to deny a Veteran a VA-guaranteed loan. In such cases, borrowers, through the lender, must provide reasons for the loan deficiency and information to establish that the cause of the delinquency has been corrected. See 38 C.F.R. § 36.4340, 36.4306; VA Pamphlet 26-7; and VA Circulars 26-20-10, Lender Guidance for Borrowers Affected by COVID-19, 26-20-19, Additional Lender Guidance Concerning COVID-19, and VA Circular 26-20-13, Valuation Practices during COVID-19, including future policy updates that would supersede Circulars listed above.

      VA will not consider a Veteran as an unsatisfactory credit risk, based solely upon the fact that the Veteran received some type of credit forbearance or experienced some type of deferred payment during the COVID-19 national emergency. VA reminds lenders instead to continue to review and evaluate all applicable credit qualifying information, e.g., residual income, debt-to income ratios, credit, and assets. Although deferred payments may not be considered for credit risk purposes, the lender should consider the monthly obligation if the debt remains active after closing the new loan.

  • R. Anthony says:

    Had a VA loan and paid on house in Idaho for 20 years (1998-2018). Great credit from paying on debt and loans over past 30 years. Sold house, quit job of 23 yrs and moved to another state to help elderly parent in their house. Have no debt, no loans, no credit cards. Parent died, moved back after two years, resumed same line of work, went to take out loan with fantastic 780 credit score and told we have no credit score because we made no payments and had no credit card for past two years. Just paid car insurance with debit card. Frustrating but God is good.

    • Scott Schang says:

      First and foremost, THANK YOU for your Service. VA does not consider a lack of credit history as an adverse factor. Here is an excerpt from the VA underwriting guidelines:

      Absence of Credit History
      For borrower(s) with no established credit history, base the determination on
      the borrower’s payment record on alternative or nontraditional credit directly
      from the borrower or creditor in which a payment history can be verified.
      Absence of a credit history is not generally considered an adverse factor.

      There are many loan officers and lenders that do not understand or choose not to take advantage of the flexibility VA offers to address issues like this.

      I would like to introduce you to someone that I know and trust that specializes in VA guidelines to give you a second opinion. If that’s ok, send me an email to scott@findmywayhome.com and let me know what State you’re buying in.

      I hope this helps?

  • Greg says:

    If I have one late payment on a lot loan, does that auto disqualify me for a VA loan. I’m told it does.

    • Scott Schang says:

      One late payment on a lot loan would not automatically disqualify your for a VA loan, but depending on how recently the late happened, it could cause issues with automated underwriting.

      The VA has a reputation for being very Veteran friendly when it comes to helping you take advantage of your home loan benefit. You may be required to explain the circumstances that led to the payment being late, and there is other qualifying criteria that must be met.

      I definitely recommend you get a second opinion. I have friends all over the Country that specialize in VA loans and manual underwriting solutions. If you would like an introduction, shoot me an email to scott@findmywayhome.com and let me know what State you’re trying to buy in.

      Thank you for your Service! I hope this helps?

  • Luke Spencer says:

    Loan officer says that the VA requires 24 months of no late payments in order to conduct a manual underwrite on a VA loan. Also states that I must have 24 months of rental history (which I do not). I was also told that I needed to clear out of March before the late payment is considered cleared.

    • Scott Schang says:

      Hi Luke, VA guidelines require a downgrade to manual underwriting if you have more than 1 x 30 days late in the past 12 months, but there is no rule for no late payments in the past 24 months.

      Also, VA loans cannot typically be used for investment / rental properties unless you once lived in the home as your primary residence.

      Are you trying to do a IRRRL refinance? Or take cash out?

      either way, it doesn’t sound to me like your loan officer has a lot of experience with VA loans, or the lender has strict overlays that are making this more difficult.

      I strongly suggest we have you get a second opinion. I know many very experienced VA loan officers around the Country. If you would like an introduction, shoot me an email to scott@findmywayhome.com and I can help you get another set of eyes on this.

      Hope this helps? THANK YOU for your service!