CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Version 1.8.2021
PURCHASE CASH-OUT/REGULAR REFINANCE VA EEM HIGH BALANCE INTEREST RATE REDUCTION REFINANCE LOAN (IRRRL)
CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
FCM VA UNDERWRITING GUIDELINES
1.01 Table of Contents 1.02 Program Overview ...... 6 1.02.01 Multiple Risk Layering ...... 7 1.03 Program Terms ...... 8 1.03.01 Program Code ...... 8 1.03.02 Term ...... 8 1.03.03 Loan Type ...... 8 1.03.04 Occupancy Type ...... 8 1.03.05 Loan-To-Value ...... 9 1.03.06 VA Funding Fee ...... 9 1.03.07 Maximum Loan Amount ...... 12 1.03.08 Entitlement/Guaranty Calculations ...... 13 1.03.09 Acceptable AUS Findings ...... 14 1.03.10 AUS Reduced Documentation ...... 15 1.03.11 VA Prior Approval Loans...... 15 1.03.12 Secondary Financing ...... 17 1.03.13 Sales Contracts ...... 18 1.03.14 Escrows ...... 19 1.03.15 Repair Escrows ...... 19 1.03.16 Ineligible Transactions ...... 20 1.03.17 VA EEM Mortgages ...... 20 1.03.18 VA High Balance Transactions ...... 23 1.03.19 Manufactured Homes Requirements and Restrictions ...... 23 1.04 Borrower Eligibility ...... 25 1.04.01 Eligible Borrowers ...... 25 1.04.02 Certificate of Eligibility ...... 27 1.04.03 Ineligible Borrowers ...... 28 1.04.04 Non-Occupant Co-Borrowers ...... 29 1.04.05 Power of Attorney (POA) ...... 29
Section 1.01 Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 2 of 107
CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
1.04.06 CAIVRS and LDP/GSA ...... 31 1.04.07 Social Security Number Verification ...... 31 1.05 Employment & Income ...... 32 1.05.01 Overview ...... 32 1.05.02 Length of Employment ...... 32 1.05.03 Salaried or Hourly Wage Earner ...... 32 1.05.04 Military Income Sources...... 34 1.05.05 Self-Employed ...... 36 1.05.06 Commission Income ...... 38 1.05.07 Rental Income ...... 39 1.05.08 Other Types of Income ...... 40 1.05.09 New Employment ...... 46 1.05.10 Contracts and Offer Letters ...... 46 1.05.11 Non-Taxable Income ...... 46 1.05.12 Temporary Leave/Short Term Disability ...... 47 1.05.13 Income Types Not Addressed ...... 48 1.05.14 Unacceptable Sources of Income ...... 48 1.05.15 4506-C Requirements ...... 49 1.05.16 IRS Tax Transcript Requirements ...... 49 1.05.17 Amended Tax Returns ...... 52 1.05.18 Residual Income ...... 52 1.05.19 Unreimbursed Employee Business Expenses ...... 54 1.06 Assets & Reserves ...... 55 1.06.01 Cash on Hand ...... 55 1.06.02 Checking and Savings Accounts and Certificates of Deposit ...... 55 1.06.03 Stocks, Bonds, and Mutual Funds ...... 56 1.06.04 Retirement Accounts (Employer Held) ...... 56 1.06.05 Retirement Accounts (Privately Held) ...... 56 1.06.06 Gift Funds ...... 57 1.06.07 Gift of Equity ...... 59 1.06.08 Proceeds from the Sale of Property ...... 59 1.06.09 Borrowed Funds ...... 59 1.06.10 Earnest Money Deposit ...... 59 1.06.11 Contributions by Interested Parties ...... 59 1.06.12 Seller-Funded Down Payment Assistance ...... 60 1.06.13 Ineligible Funds ...... 60 1.06.14 Large Deposits ...... 60 1.06.15 Reserve Requirements ...... 60
Section 1.01 Table of Contents Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 3 of 107
CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
1.07 Credit ...... 62 1.07.01 Credit Report Requirements ...... 62 1.07.02 Nontraditional Credit ...... 62 1.07.03 Age of Credit Documents ...... 62 1.07.04 Credit Score Requirements ...... 62 1.07.05 Inquiries ...... 63 1.07.06 Maximum Debt Ratio ...... 63 1.07.07 Housing History ...... 64 1.07.08 Open Charge / Revolving Accounts ...... 64 1.07.09 30-Day Charge Accounts ...... 65 1.07.10 HELOC Accounts ...... 65 1.07.11 Lease Payments ...... 65 1.07.12 Alimony, Child Support or Separate Maintenance ...... 65 1.07.13 Child Care Expenses ...... 66 1.07.14 Contingent Liabilities / Co-Signed Loans ...... 66 1.07.15 Business Debt ...... 67 1.07.16 Financed Properties ...... 67 1.07.17 Loans Secured by Liquid Assets ...... 68 1.07.18 Installment Debt ...... 68 1.07.19 Deferred Installment Debt ...... 69 1.07.20 Student Loans...... 69 1.07.21 “Paying Down” Accounts ...... 69 1.07.22 Disputed Accounts ...... 69 1.07.23 Past Due Accounts...... 70 1.07.24 Collections/Charge-offs ...... 70 1.07.25 Outstanding Federally Insured or Guaranteed Debt ...... 70 1.07.26 Judgments/Liens ...... 71 1.07.27 Chapter 7 Bankruptcy ...... 71 1.07.28 Chapter 13 Bankruptcy ...... 72 1.07.29 Consumer Credit Counseling (CCC) ...... 73 1.07.30 Multiple Bankruptcy Filings ...... 73 1.07.31 Foreclosure ...... 73 1.07.32 Deed-In-Lieu of Foreclosure ...... 74 1.07.33 Short Sales ...... 74 1.07.34 Community Property States ...... 74 1.07.35 Compensating Factors ...... 75 1.08 Property ...... 76 1.08.01 Geographical Restrictions ...... 76
Section 1.01 Table of Contents Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 4 of 107
CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
1.08.02 Title Commitment ...... 77 1.08.03 Hazard, Flood and Condo Insurance ...... 78 1.08.04 Occupancy Types ...... 78 1.08.05 Property Evaluation ...... 79 1.08.06 New Construction ...... 89 1.08.07 Declining Markets ...... 92 1.08.08 Right of Redemption Transactions ...... 92 1.09 Refinance Transactions ...... 94 1.09.01 General Overview ...... 94 1.09.02 Cash Out / Regular Refinances ...... 94 1.09.03 Interest Rate Reduction Refinance Loan (IRRRL) ...... 98 1.10 Adjustable Rate Mortgage (ARM) Transactions ...... 103 1.11 Definitions ...... 104
Section 1.01 Table of Contents Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 5 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.02 Program Overview
1.02 Program Overview The Department of Veterans Affairs (VA) loans are guaranteed by the Federal Government and available to eligible veterans and, under certain circumstances, spouses of veterans. VA’s underwriting standards are intended to provide guidelines for underwriters. Underwriting decisions must be based on sound application of the underwriting standards, and underwriters are expected to use good judgment and flexibility in applying the guidelines set forth in the following pages. By law, VA may only guarantee a loan when it is possible to determine that the veteran:
• is a satisfactory credit risk, and • has present and anticipated income that bears a proper relation to the contemplated terms of repayment.
This guide should be treated as a supplement to the standard VA Handbook Pamphlet 26-7. As stated in the VA Handbook, this guide “…does not deal with every possible circumstance that will arise; therefore, underwriters must apply reasonable judgment and flexibility in administering this important veteran’s benefit.” The various types of VA loans covered in this guide can be found on the organizational chart below.
VA
Purchase Refinance
Standard Cash-Out
High IRRRL Balance
High VA EEM Balance
VA EEM
Section 1.02 Program Overview Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 7 of 107
CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
1.02.01 Multiple Risk Layering Underwriters must take into account the file as a whole when evaluating any file for approval. Although the AUS findings are an essential tool in today’s mortgage underwriting marketplace, in the end they are just that, tools to be used by the underwriter to help evaluate the overall risk tolerance for any given file. It will always fall back to the underwriter’s experience and seasoned real-world skills in order to determine a file’s creditworthiness and viability in the secondary marketplace.
That said, our underwriters are trained to assess the transaction for multiple layers of risk on any given file. Past performance has shown that individual risks and blemishes on a borrower’s application may not pose a large potential for lack of repayment, however when multiple layers of risk are combined the performance levels drop significantly.
Some examples of these types of risks are:
• High Debt-To-Income Ratios • Payment Shock • Serious Adverse Credit • Duration of Employment • ARM Loans
Section 1.02 Program Overview Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 7 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.03 Program Terms
1.03 Program Terms
1.03.01 Program Code • VA30: All VA 30-Year, 25-Year, & 20-Year Term Programs • VA15: All VA 15-Year Term Programs • VAIRRRL30: Interest Rate Reduction Refinance Loan – 30, 20 & 25 Year Terms • VAIRRRL15: Interest Rate Reduction Refinance Loan – 15 Year Term • VAJ30: VA High Balance/Jumbo – 30 Year Term • VAEEM30 VA Energy Efficient Mortgage • VA5/1ARM: VA 5/1 Adjustable Rate Mortgage
1.03.02 Term • Purchase: 15/20/25/30 Year Terms Available • Non-IRRRL Refinance: 15/20/25/30 Year Terms Available • IRRRL: 15/20/25/30 Year Terms Available • High Balance: 30 Year Term Only • VA EEM 30 Year Term Only
1.03.03 Loan Type • Purchase: Fixed Rate or 5/1 ARM • Non-IRRRL Refinance: Fixed Rate or 5/1 ARM • IRRRL: Fixed Rate Only • High Balance: Fixed Rate Only • VA EEM Fixed Rate Only
1.03.04 Occupancy Type • Purchase: Primary Residence Only • Non-IRRRL Refinance: Primary Residence Only • IRRRL: Primary Residence and Investment • High Balance: Primary Residence Only • VA EEM Primary Residence Only
Section 1.03 Program Terms Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 8 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.03 Program Terms
1.03.05 Loan-To-Value Maximum Loan-To-Value (LTV) on a VA loan is calculated as follows: • VA purchase is determined by using the base loan amount. • VA Cash-out or VA IRRRL Transaction is determined by using the total loan amount. The base loan amount is the maximum loan amount prior to the addition of the financed VA Funding Fee. The total loan amount includes the financed VA Funding Fee.
The most recent FCM Credit Score/Loan-To-Value Matrix can be found by referencing the link below:
FCM CREDIT SCORE/LTV MATRIX
1.03.06 VA Funding Fee The table below is effective for loans closed on or after January 1, 2020 and before January, 1 2022:
Type of Loan Down Payment Percentage (%) for Percentage (%) for First Time Use Subsequent Use Purchase and • None • 2.30 • 3.60 Construction • 5% but less • 1.65 • 1.65 than 10% • 1.40 • 1.40 • 10% or more Cash-Out Refinance N/A 2.30 3.60 IRRRLs N/A 0.50 0.50 Loan Assumptions N/A 0.50 0.50
Waiver of Fees for Purple Heart Recipients: Funding Fees are waived for Members of the Armed Forces who are serving on active duty and provide, on or before the date of loan closing (even if it was awarded during a prior period of military service), certificate or military orders if having been awarded the Purple Heart. VA will accept the following as evidence of the Purple Heart Award: Purple Heart Certificate, a DD214 clearly showing the Purple Heart award, or military orders. The following conditions on the COE will denote eligibility for the funding fee waiver: Active Duty Servicemember, Purple Heart Recipient, and Funding Fee. Note: All three conditions must be present to establish the waiver. VA will accept the following as sufficient evidence to demonstrate eligibility for the Purple Heart funding fee waiver: Purple Heart Certificate, a DD214 clearly showing the Purple Heart award, or military orders. Evidence of the Purple Heart award must be received by VA or the lender on or before the date of loan closing.
Section 1.03 Program Terms Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 9 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.03 Program Terms The following conditions on the COE will denote eligibility for the funding fee waiver: Active Duty Servicemember, Purple Heart Recipient, and Funding Fee. Note: All three conditions must be present to establish the waiver.
(a) A COE that indicates a Purple Heart funding fee waiver expires upon discharge of the active duty servicemember. If the active duty servicemember is discharged or scheduled to be discharged on or prior to loan closing, a new COE is required.
(b) If the COE does not include the referenced COE conditions and the active duty servicemember is eligible for the Purple Heart funding fee waiver, evidence of the Purple Heart award must be uploaded into the COE record in the VA portal for review on or before the date of loan closing.
1.03.06.01 Overview • The VA Funding Fee is non-refundable but may be split between financed and paid in cash. • The loan amount may exceed the applicable LTV by the amount of the funding fee; however, it cannot exceed the VA County Loan Limits. • The Certificate of Eligibility must be reviewed to verify if the borrower has previously used his/her eligibility as noted by one of the following:
o a number “5” in the block titled “Entitlement Code” indicating that the eligibility has been restored (it may be posted as the original entry or be entered with the original entitlement code and crossed out), and/or
o a loan number posted on the certificate under the “Loan Number” block.
• In the absence of these indicators or any other evidence that the veteran has had a prior VA loan, the Certificate of Eligibility may be accepted as presented and the funding fee calculated as if the veteran is a first-time user.
1.03.06.02 Exemptions The following persons are exempt from paying the funding fee:
a. A Veteran who is receiving disability compensation (or who, but for the receipt of retirement pay or active service pay, would be entitled to receive compensation). b. A surviving spouse of any Veteran (including a person who died during active military, naval, or air service) who died from a service-connected disability. The surviving spouse must be in receipt of Dependency and Indemnity Compensation (DIC)
Section 1.03 Program Terms Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 10 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.03 Program Terms c. A Veteran who is rated eligible to receive compensation resulting from a pre- discharge disability examination or rating, or based on a pre-discharge review of existing medical evidence that results in the issuance of a memorandum rating before the loan closing takes place.
Exemption is verified by the COE or the Verification of VA Benefit-Related Indebtedness Letter (VA Form 26-8937).
The funding fee cannot be waived under any circumstances without VA’s executed statement of the veteran’s exempt status on the Verification of VA Benefit Related Indebtedness Letter.
a. Funding Fee Exemption Determination. Ensuring that the funding fee exemption information is up to date at the time of closing is essential to avoid incorrect charges to exempt Veterans. FCM/lenders must not advise Veterans who believe they are exempt from paying the funding fee to close on a loan without first establishing their funding fee exemption status. And request a funding fee refund at a later date. The veteran’s funding fee exemption status must be established before closing
b. For IRRRLs, a COE is now required, except in the following three situations:
• The Veteran has already been determined to be exempt from the funding fee as evidenced on IRRRL assignment screen in WebLGY. • The entitlement encumbered on the loan being refinanced belongs to the surviving spouse of a Veteran. • The entitlement encumbered on the loan being refinanced belongs to a Veteran who has since passed away and the IRRRL borrower is spouse who was also a co-borrower on the loan being refinanced.
Please note: The spouse of a Veteran who is now deceased, will not be considered exempt from the VA Funding Fee unless (s)he is in receipt of DIC. Lenders may remit VA Form 26- 8937, Verification of Benefits, to the RLC of Jurisdiction to verify a surviving spouse’s exempt status
c. For all loans, if the COE does not show that the Veteran is exempt from paying the funding fee, the lender must ask the Veteran if he or she has a claim for compensation pending with VA. If so, FCM must obtain an updated COE no earlier than 3 days before the loan closing using the COE “Correct” function in WebLGY. Instructions for the “Correct” function are found
Section 1.03 Program Terms Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 11 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.03 Program Terms in the “Quick Reference Document for Correct Certificate of Eligibility”. Step-by-step instructions are available on the VA’s Lender Resource web page in the Lender’s COE tutorial.
d. The lender must ask the Active Duty Servicemember if he or she has a pre-discharge claim pending. If so, the lender must contact the Regional Loan Center (RLC) immediately to request assistance in obtaining a proposed or memorandum rating in the event that the Servicemember may be exempt from paying the funding fee as noted in Item 2 above. If a proposed or memorandum rating is not obtained and a closing takes place, the Servicemember is not eligible for funding fee exemption.
e. Funding Fee Correction Request. Lenders and servicers must initiate a request in the Funding Fee Payment System (FFPS) within 3 business days from being notified by VA or the Veteran of an overpayment of the funding fee to include a request for a retroactive refund. Necessary corrections may be made in FFPS by utilizing the “Correct “function at any time. Lenders and servicers must provide a detailed explanation together with the name, phone number, and email address of the person requesting the correction/waiver on behalf of the Veteran.
f. Funding Fee Refunds. Funding fee refunds must be paid to the Veteran by VA through FFPS. The lender/servicer must change the refund destination from ‘Lender/Vendor’ to ‘Primary Veteran’ in the refund setting section of FFPS. If the loan is in default, the Veteran will be advised that he/she may wish to use the refund to bring their loan current. When a funding fee refund does not involve a Veteran, for example, a lender paid a funding fee to VA in error which was not charged to a Veteran, or a lender paid a funding fee before the Veteran decided not to close the loan, the refund destination will be “Lender/Vendor” in FFPS and the RLC will refund the funding fee to the lender.
1.03.07 Maximum Loan Amount ***Effective for loans closed on or after January 1, 2020
All non-IRRRL and IRRRL transactions: the maximum loan amount and guarantee requirements for purchase, non IRRRL refinance transactions and IRRRL transactions are as follows: • Maximum base loan amount for purchase, non IRRRL refinances and for IRRRLs cannot exceed $1 million. • Loans must also meet the minimum Ginnie Mae 25% guaranty requirement. The funding fee charged by VA must not be included in this calculation.
Section 1.03 Program Terms Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 12 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.03 Program Terms
o The 2020 effective loan limit is posted at: http://www.benefits.va.gov/homeloans/purchaseco_loan_limits.asp.
Loan amounts above the conforming loan limit must follow high balance guidelines.
1The veteran’s available entitlement plus the veteran’s down payment and/or equity in the property must equal at least 25% of the purchase price or Notification of Value (NOV), whichever less, on purchases, new construction, and non-IRRRL refinances. IRRRL’s are not subject to this rule as VA will automatically issue a 25% guaranty on any eligible IRRRL transaction. Bonus entitlement may be used for total loan amounts greater than $144,000 (VA Circular 26-08-19).
Note that for purposes of determining the VA guaranty for loans involving Veterans with partial entitlement, lenders are instructed to reference only the One-Unit Limit column in the Federal Housing Finance Agency (FHFA) Table “Loan Limits for Calendar Year 2020- All Counties”. While a Veteran may use the VA home loan guaranty benefit to acquire a property up to 4-units in size, VA’s maximum guaranty amount will be based on the One-Unit (single-family residence) limit, as prescribed by FHFA
1.03.08 Entitlement/Guaranty Calculations Blue Water Navy Vietnam Veterans Act of 2019, Freddie Mac CLLs are no longer a factor for Veterans with full entitlement, however, are still utilized for determining maximum guaranty for Veterans with partial entitlement.
The county loan limits do not apply to IRRRLs: VA will guarantee 25 percent of the loan amount on an IRRRL, regardless of the Veteran’s entitlement.
Adjustment of Maximum Entitlement Amounts. The Act amends 38 U.S.C. § 3703(a)(1) by adjusting the maximum amount of guaranty entitlement available to Veterans for loans above $144,000 made to purchase, refinance (cash-out refi), or construct a home as follows:
a. Full entitlement. For Veterans with full entitlement, the maximum amount of guaranty entitlement available to the Veteran, for a loan above $144,000 shall be 25 percent of the loan amount.
Section 1.03 Program Terms Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 13 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.03 Program Terms
has not been restored, the maximum amount of guaranty entitlement available to the Veteran, for a loan above $144,000 shall be 25 percent of the Freddie Mac conforming loan limit (CLL), reduced by the amount of entitlement previously used (not restored) by the Veteran.
Adjustment of Maximum Guaranty Amounts. The Act also amends 38 U.S.C. § 3703(a)(1) by adjusting the maximum amount of guaranty for loans above $144,000 made to purchase, refinance (cash-out refi), or construct a home as outlined below.
a. Full entitlement. For loans above $144,000, the maximum amount of guaranty may not exceed 25 percent of the loan amount.
b. Partial entitlement. For loans above $144,000, the maximum amount of guaranty may not exceed the lesser of 25 percent of the loan amount OR 25 percent of the Freddie Mac CLL
c. Married Veterans. When a Veteran and the Veteran’s spouse, who is also a Veteran, use dual entitlement to guaranty a loan above $144,000, the maximum amount of guaranty shall be 25 percent of the loan amount so long as one of the Veterans has full entitlement. VA will charge entitlement for married Veterans according to their preference. If both Veterans have partial entitlement, the maximum amount of guaranty may not exceed the lesser of 25 percent of the loan amount OR 25 percent of the Freddie Mac CLL.
d. Joint Loans. When more than one Veteran (Vet-Vet) seeks to use their entitlement on a loan above $144,000, if at least one Veteran has partial entitlement, the maximum amount of guaranty may not exceed the lesser of 25 percent of the loan amount OR 25 percent of the Freddie Mac CLL. VA will charge entitlement to each Veteran equally. However, unequal charge of entitlement may be made with a signed written agreement from the Veterans if provided to VA prior to the issuance of the VA guaranty. If all Veterans seeking to use their entitlement on a loan above $144,000 have full entitlement, then the maximum amount of guaranty shall be 25 percent of the loan amount. All other existing VA policies regarding joint loans, such as Veteran/Non-Veteran joint loans, remain the same.
Click on link for calculation examples for guaranty: Adjustment of loan limit Examples
1.03.09 Acceptable AUS Findings The following AUS findings are acceptable.
Section 1.03 Program Terms Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 14 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.03 Program Terms
• DU Approve/Ineligible1 • LP Accept/Accept/Eligible • LP Accept/Accept/Ineligible1 • LP Refer2 • DU Refer/Eligible2
1only for VA High Balance loans when the reason for ineligibility is solely due to the loan amount 2only with Underwriting Management approval
Note that IRRRL transactions should not be run through LP or DU. IRRRL transactions inadvertently run through AUS are permitted, and documentation of values is not required.
1.03.10 AUS Reduced Documentation Reduced documentation as specifically addressed by properly submitted AUS findings is acceptable.
1.03.11 VA Prior Approval Loans For certain scenarios VA loans must be submitted to the VA RLC for Prior Approval. The loan must be submitted through WebLGY. The following scenarios are required to be submitted to VA for prior approval:
• Joint Loans (Veteran and Non-Spouse Co-Borrower (two or more unmarried Veterans who are each using the home loan entitlement are not required to be sent to VA for prior approval). • Loans to veterans in receipt of VA nonservice-connected pension • Loans to veterans rated incompetent by VA
The following loans are not offered by FCM:
• IRRRLS made to refinance delinquent VA Loans • Manufactured Home loans when not permanently affixed to the lot • Unsecured loans or loans secured by less than a first lien • Supplemental Loans
The Prior Approval process is not to be used to shift the burden of denial to the VA. The lender must still use prudent underwriting decision making per VA requirements and deny loans that do not meet VA Credit and Quality standards.
Section 1.03 Program Terms Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 15 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.03 Program Terms
1.03.11.01 Loan Submission to VA After the loan is fully underwritten and approved by an FCM SAR Underwriter the loan must be submitted to the VA RLC through WebLGY by the loan processor. The following is a stacking order for submission:
Order Document 1 Lender’s cover or transmittal letter, including the reason for submission
2 VA Form 26-8937, Verification of VA Benefits (if applicable)
3 URLA with revised VA Form 26-1802a, Department of Housing and Urban Development (HUD)/VA Addendum to URLA. These final forms must be properly completed, legible, signed, and dated.
4 VA Form 26-8497, Request for Verification of Employment or alternative verification of employment (VOE), and other verifications of income such as pay stubs and tax returns.
5 CAIVRS; borrower/co-borrower
6 All credit reports obtained in connection with the loan and any related documentation.
Section 1.03 Program Terms Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 16 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.03 Program Terms
7 VA Form 26-8497a, Request for Verification of Deposit or alternative verification of deposit (VOD) 8 VA Form 26-6393, Loan Analysis, completed and legibly signed
9 VA Form 26-0592, Counseling Checklist for Military Homebuyers, (if applicant is on active duty) 10 Loan estimate 11 Documentation of the cost of energy efficiency improvements to be included in the loan. The energy improvement loan amount cannot exceed $6,000. 12 Any other necessary documents. For example, but not limited to: loan payoff statement, POA, lenders loan quality certification, verification of rent for a 12-month rental history.
VA will review the loan submission and issue one of the following:
• Request for additional information (conditions) • Deny the loan and send notice to the lender and applicant • Issue a Certificate of Commitment
Once a Certificate of Commitment is issued, loan closing occurs the same as on a lender automated approval loan.
1.03.12 Secondary Financing Secondary financing is generally acceptable as long as the veteran is not placed in a substantially worse position than if the entire amount borrowed had been guaranteed by VA. In addition, the following requirements must be met:
• Secondary financing must be obtained simultaneously with the VA guaranteed first mortgage, both secured by the same property • Documentation must be submitted disclosing the source, amount, and repayment terms of the second and agreement to such terms by the veteran and any co-obligors. • The second must be subordinated to the VA-guaranteed first loan. • Housing Assistance Programs are not allowed. • The interest rate on the second may exceed the rate on the VA-guaranteed first; however, it may not exceed industry standards for second mortgages.
Section 1.03 Program Terms Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 17 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.03 Program Terms
• The proceeds of the second may be used for:
o Closing costs and/or prepaids, or o A down payment after the secondary market requirements have been met.
• Proceeds of the second mortgage may not be used to cover any portion of a down payment required by VA to cover the excess of the purchase price over the reasonable value of the property as established by VA or the LAPP underwriter. • There should be a reasonable grace period before either of the following:
o A late charge comes due, or o Commencement of foreclosure proceedings in the event of default.
• The second must be assumable by creditworthy purchasers and should not restrict the veteran’s ability to sell the property any more than the VA first mortgage. • The loan in conjunction with the first, may not exceed the NOV
Note: The cash down payment derived from secondary financing cannot be used toward the required VA guaranty of 25%.
1.03.12.01 Purchase Transactions New subordinate financing is allowed on VA purchase transactions.
The VA funding fee is charged only on the first lien and must be financed in the VA loan or paid in cash by the seller or with borrower funds not derived from the second mortgage.
1.03.12.02 Cash Out / Regular Refinance and IRRRL Transactions Existing subordinate financing may remain in place, however, the CLTV cannot exceed the maximum allowable LTV for the transaction.
New subordinate financing is not allowed on any Refinance Transaction.
1.03.12.03 High Balance Transactions New secondary and/or existing subordinate financing are not allowed on High Balance transactions.
1.03.13 Sales Contracts The Escape Clause must be contained in the sales contract for all VA-guaranteed loans. The underwriter is responsible for ensuring that the paragraph is in the sales contract prior to closing.
Section 1.03 Program Terms Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 18 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.03 Program Terms
Clause is in the contract and the contract is signed by the Veteran and seller.
Upgrades are not considered earnest money and the builder is not required to refund this money. When the NOV is below the sales contract price, this clause protects the Veteran with negotiation of the sales contract.
If the sales contract was signed by the Veteran prior to receipt of the NOV, the contract must include, or be amended to include, the clause below:
“It is expressly agreed that, notwithstanding any other provisions of this contract, the purchaser shall not incur any penalty by forfeiture of earnest money or otherwise or be obligated to complete the purchase of the property described herein, if the contract purchase price or cost exceeds the reasonable value of the property established by the Department of Veterans Affairs. The purchaser shall, however, have the privilege and option of proceeding with the consummation of this contract without regard to the amount of the reasonable value established by the Department of Veterans Affairs (38 U.S.C. 501, 3703(c)(1)).”
1.03.14 Escrows Tax and Insurance Escrows are required on all VA loans regardless of loan characteristics.
Homestead taxes may be used for qualifying and escrow purposes if the amount is verified by the title company and there is a reasonable belief the borrower will qualify for, or continue to qualify for, the exemption based on local and state qualification standards.
1.03.15 Repair Escrows Repair Escrows are reviewed on a case-by-case basis, but as a general guideline, must satisfy at least all of the stipulations below:
• Repairs must be required by the appraiser on the appraisal report. • Repair Escrows may not cover any repair that would be considered a structural issue, is hazardous or may affect safety/soundness. (i.e. Mold removal and mitigation) • Maximum Repair Amount: $5,000 • Major Repairs require a Professional Estimate from a Licensed/Bonded Individual. Major repairs to include major electrical, plumbing, mechanical systems or erosion/drainage. • Minor Repairs up to $1500 may be completed by the borrower (ie. Paint, Drywall, Trim etc). Repairs beyond the $1500 limit can be completed by borrower with prior underwriting approval.
Section 1.03 Program Terms Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 19 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.03 Program Terms
• 100% of the estimate may be included in the base loan amount (up to the appraised value). Any unused portion of the financed escrow will be credit back to the loan as a principal reduction. • The additional 50% must be funded by another source (borrower, seller, etc.) This part of the escrow is the only portion refundable to the borrower. • 30 day standard escrow timeframe. Up to 90 days escrow may be allowed if weather related items cannot be completed in time due to inclement weather • A Final inspection is required and an Inspection Fee must be added • Borrower/LO must notify FCM of completed repairs. All receipts must be sent to [email protected]. FCM will order a final inspection and pay for that inspection from escrow funds. Lenders are not required to escrow funds when: • the incomplete work is limited to the installation of landscaping features due to inclement weather (lawns, shrubbery, etc.), • the estimate of the cost to complete the work is not greater than $2,500, and • there is adequate assurance that the work will be completed timely and satisfactorily (usually 90 to 120 days).
1.03.16 Ineligible Transactions • Graduated Payment Mortgages (GPMs) • Growing Equity Mortgages (GEMs) • Farm Residence Loans • Loans Involving Temporary Interest Rate Buydowns • Texas 50 (a)(6) refinances transactions
1.03.17 VA EEM Mortgages EEMs are loans to cover the cost of making energy efficiency improvements to an existing dwelling. Funds for energy efficiency improvements are considered part of the total loan. Borrowers have 120 days to complete repairs/improvements and request re-inspection for release of funds. Funds will be disbursed to borrower if proof of paid receipts is provided OR to contractor if final invoices are submitted. A final inspection will be required to confirm work is completed in a professional manner.
Section 1.03 Program Terms Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 20 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.03 Program Terms
1.03.17.01 Eligible Transactions • Purchase • Refinance • IRRRL *
*If the new PITI payment with EEM funds exceeds the existing PITI payment by 20%, the underwriter must determine and certify that the veteran is qualified for the higher payment.
1.03.17.02 Borrower Notice on NOV • Information on EEMs is provided to a Veteran who applies for a loan which requires an NOV (a loan for a home purchase or regular “cash-out” refinance). The NOV includes the following notice to the Veteran:
“The buyer may wish to contact a qualified person/firm for a home energy audit to identify needed energy efficiency improvements to the property. In some localities, the utility company may perform this service. The mortgage amount may be increased as a result of making energy efficiency improvements such as: Solar or conventional heating/cooling systems, water heaters, insulation, weather-stripping/caulking, and storm windows/doors. Other energy related improvements may also be considered.”
1.03.17.03 Amounts Available • up to $3,000 based solely on the documented costs of approved improvements • $3001- $6,000 provided the increase in monthly mortgage payment does not exceed the likely reduction in monthly utility costs as documented by an energy audit company, utility company or state agency providing such service.
1.03.17.04 Acceptable Energy Efficient Improvements • solar heating systems, including solar systems for heating water for domestic use • solar heating and cooling systems, • caulking and weather-stripping, • furnace efficiency modifications limited to replacement of burners, boilers or furnaces designed to reduce the firing rate or to achieve a reduction in the amount of fuel consumed as a result of increased combustion efficiency, devices for modifying flue openings which will increase the efficiency of the heating system,
Section 1.03 Program Terms Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 21 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.03 Program Terms
And electrical or mechanical furnace ignition systems which replace standing gas pilot lights, • Clock thermostats, • New or additional ceiling, attic, wall, and floor insulation, • water heater insulation, • storm windows and/or doors, including thermal windows and/or doors, • heat pumps, and • vapor barriers.
Note: Improvements may be made/installed by borrower, however, the funds will then be limited to the cost of materials only. If a license is generally required to make the improvements, the borrower must hold that license in order to perform the work.
1.03.17.05 Funding Fee, Guaranty and Entitlement Calculations Funding Fee: will be based on total loan amount INCLUDING EEM funds.
Veteran’s Entitlement Calculation: will be based on the loan amount BEFORE the EEM funds.
VA’s Loan Guarantee Calculation: will be based on the loan amount INCLUDING the EEM funds.
1.03.17.06 Required Documentation The following documentation is required for a VA EEM loan:
Underwriting • Bids and Estimates for Proposed EE Improvements • Energy Audit/ energy savings documentation for EEM funds greater than $3001 Closing • EEM Escrow Agreement Post-Closing • Request for final inspection and disbursement of funds (Final Invoices/paid receipts) shall be sent to [email protected]. Fund Shortages • Overages will be applied to the outstanding principal and Overages balance of the VA loan • Shortages will be the borrower’s responsibility. See EEM Escrow Agreement
Section 1.03 Program Terms Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 22 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.03 Program Terms 1.03.18 VA High Balance Transactions Effective for issuances on or after January, 1 2020, a High Balance loan is defined as a single- family forward mortgage loan with an original principal balance (minus the amount of any up front mortgage insurance premium) that exceeds the {applicable FHFA conforming loan limit as defined in the APM}.
Regardless of the loan amount, the VA Guaranty plus cash/equity must be equal to at least 25% of the purchase price or Notification of Value (NOV), whichever is less, on purchases and non-IRRRL refinances.
These transactions require the following stipulations be verified before submission to FCM:
• Primary Residence only • 30 Year Fixed Only • Minimum Credit Score is 620
Maximum Loan Amount 1-unit residence: $1 Million. Lock Desk MAY consider exceptions for loans with higher credit scores. For 2-4 unit transactions, contact Retail Loan Scenarios for maximum loan amount and restrictions. • Must have DU Approve/Eligible or LP Accept - no manual underwrites Note that for purposes of determining the VA guaranty for loans involving Veterans with partial entitlement, lenders are instructed to reference only the One-Unit Limit column in the Federal Housing Finance Agency (FHFA) Table “Loan Limits for Calendar Year 2020- All Counties”. While a Veteran may use the VA home loan guaranty benefit to acquire a property up to 4-units in size, VA’s maximum guaranty amount will be based on the One-Unit (single-family residence) limit, as prescribed by FHFA
For the most accurate pricing on High Balance transactions please contact the lock desk directly.
1.03.19 Manufactured Homes Requirements and Restrictions Manufactured Homes are eligible for financing under the VA program. The following list of restrictions and requirements are in addition to regular program underwriting requirements:
• 640 minimum Credit Score • 30 Year Fixed Rate Only
Section 1.03 Program Terms Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 23 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.03 Program Terms • No VA Jumbo • Purchases and Refinances (cash out is now allowed) • Approve/Accept/Eligible only • There is no specific acreage limit, however, generally the land-to-value should not exceed 30% of total value. • Properties with an unexpired right of redemption are ineligible. • Singlewide homes are not eligible. • Minimum 700 Sq Ft.
Property Requirements:
• Home must have been manufactured in 1994 or newer. • If moved from the original site, an engineer cert is required. Verification of wheels, axles, tongue and running lights have been removed. • Manufactured Home must be titled as real property prior to “Clear-to-Close”
Section 1.03 Program Terms Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 24 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.04 Borrower Eligibility
1.04 Borrower Eligibility
1.04.01 Eligible Borrowers Eligible borrowers include any man or woman who has served in the past, or is currently serving in the Armed Services for the period of time as required by VA for eligibility of VA benefits, depending on the era of their service. Additional information regarding exact terms of service can be found at the VA website.
1.04.01.01 Total Number of Borrowers The total number of borrowers on a VA loan is limited to 4 regardless of AUS type.
1.04.01.02 Veteran/Borrower Combination Eligibility Eligible Veteran/Borrower Combinations:
• Veteran • Veteran and non-veteran spouse* • Two veterans who are married to each other where only one veteran will be using entitlement. • Two veterans who are married to each other where each veteran will be using entitlement. • Surviving spouse* of an eligible veteran (if determined eligible by a VA-issued COE) • Spouse* of an active-duty service person who has been listed as MIA or POW for more than 90 days (if determined eligible by VA-issued COE).
*Spousal Status: Per federal law, VA recognizes same sex marriage without regard to state of residence. Same- sex marriage applicants should be treated the same as opposite sex marriage applicants.
Ineligible Veteran/Borrower Combinations:
• Any type of borrower not listed as eligible, including but not limited to: • Veteran and non-veteran who is not the veteran’s spouse (because VA will only issue guaranty on the veteran’s portion of the loan). • Any individual without a valid U.S. Social Security Number. • Individuals with a U.W. Individual Taxpayer Identification Number (ITIN). An ITIN is formatted like a SSN but begins with a “9”. No valid SSN begins with a “9”. • Non-occupying Veteran. • Foreign nationals and borrower with diplomatic immunity.
Section 1.04 Borrower Eligibility Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 25 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.04 Borrower Eligibility 1.04.01.03 Valid Social Security number (U.S. Citizens and Non-U.S. Citizens) Each borrower on the loan transaction must have a valid Social Security number. In addition, any borrower who is not a U.S. citizen must meet the requirements in the following section.
1.04.01.04 Permanent Resident Aliens A copy of the Green Card is required for all permanent resident aliens whose income and/or assets are being used to qualify for a loan. A copy of the front and back of the card is required and must be included in the loan file.
While the Green Card itself states "Do Not Duplicate" for the purpose of replacing the original card, U.S. Citizenship and Immigration Services (USCIS) allows photocopying of the Green Card. Making an enlarged copy or copying on colored paper may alleviate any concerns the borrower may have with photocopying.
1.04.01.05 Non-Permanent Resident Aliens For all non-us Citizens and Non-Permanent Resident Aliens, please submit all citizenship status paperwork to [email protected] for review and approval. VISA, EAD and/or Social Security Card should be submitted if applicable.
1.04.01.06 Borrowers Not Yet Divorced/Divorce Not Final Borrowers who are separated/legally separated and not yet divorced may be eligible to purchase a primary residence prior to finalizing their divorce provided specific documentation is provided:
• Recorded Legal Separation Agreement: In states where legal separations are recorded the agreement may be provided to determine assignment of credit obligations, current real estate holding disposition and future alimony/child support obligations. If there are minor children a child support worksheet provided by the court or attorneys must be provided. • Marital Dissolution Agreement: In states where MDAs are prepared, the agreement may be provided to determine assignment of credit obligations, current real estate holding disposition and future alimony/child support obligations. If there are minor children a child support worksheet provided by the court or attorneys must be provided. • Notarized Letter from Borrowers and Attorneys: In states where legal separation is not recognized and Marital Dissolution Agreements are not prepared, the borrower may provide a written separation plan signed by both parties and notarized. The attorneys representing each spouse must also submit letters stating this plan has been
Section 1.04 Borrower Eligibility Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 26 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.04 Borrower Eligibility agreed upon and is likely to be accepted as is by the courts. If there are minor children, a child support worksheet completed by each attorney must be included.
NOTE: Please see Alimony, Child Support or Separate Maintenance section to determine if payments being received may be included in qualifying income.
1.04.02 Certificate of Eligibility A certificate of eligibility (COE) with sufficient entitlement to meet minimum 25% guaranty is required on all loans.
Eligibility for the VA home loan benefit can only be determined by VA and must be evidenced by a VA Certificate of Eligibility (COE).
Automated COEs are good for 90 days from acquisition.
Once a COE is issued there may be conditions on the COE which must be met in order to receive a guaranty. The conditions that could appear on the COE are:
• Active Duty Service Member (ADSM) - Valid unless discharged or released subsequent to date of this certificate. A certification of continuous active duty as of date of note is required. This COE is not valid if the ADSM was discharged after the date of the certificate. In this instance, a new COE must be obtained. • Funding Fee – Please fax a copy of VA Form 26-8937 to the Regional Loan Center (RLC) of Jurisdiction. Please have the lender contact the RLC for loan processing. • Funding Fee – Veteran is not exempt from funding fee due to non-service connected pension. Loan application will require prior approval processing by VA. • Reserve or National Guard Member – Valid unless discharged or released subsequent to the date of this certificate. A certification of continuous service in the Selected Reserve or National Guard as of the date of the note is required. • Reserve/National Guard Funding Fee – Entitlement is based on service in the Selected Reserve and/or National Guard so an increased funding fee is required. • Refinance Restoration – Restored entitlement previously used or charged for a VA Loan Identification Number (LIN) as shown here is available only for use in connection with the property which secured that loan.
Section 1.04 Borrower Eligibility Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 27 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.04 Borrower Eligibility • One-Time Restoration – Entitlement previously used for a VA LIN has been restored without disposal of the property, under provision of 38 U.S.C. 3702 (b)(4). Any future restoration requires disposal of all property obtained with a VA loan. • Subsequent Use Funding Fee – Entitlement code of “5” indicates previously used entitlement has been restored. The Veteran must pay a subsequent use funding fee on any future loan unless the Veteran is exempt. • Surviving Spouse – Eligibility of the surviving spouse and the validity of guaranty entitlement hereby evidenced will be null and void if any change in marital status occurs, subsequent to the date of this COE and prior to the date a loan to the widow or widower is closed, unless the lender making the loan was not aware of any change in marital status and obtained on the date the loan closed an affidavit from the surviving spouse in the form prescribed by the Secretary. • Prisoner of War/Missing in Action (POW/MIA) – This certificate evidences eligibility under 38 U.S.C 3701 (b)(3) of the individual named as the spouse of a Servicemember missing in action or prisoner of war. Any unused entitlement will terminate automatically upon the receipt of official notice that the Servicemember is no longer in a category specified in 38 U.S.C. 3701 (b)(3) or upon dissolution of marriage. • Paid-in-Full Loan – Entitlement charged on a paid-in-full loan cannot be restored until the Veteran applies for restoration of entitlement. The lender shall submit the application electronically through VA’s Automated Certificate of Eligibility (ACE) online application. • Foreclosed Loan – Entitlement charged on a foreclosed loan cannot be restored until VA’s loss on the loan has been fully repaid. Information about repayment of the loss may be obtained by contacting an RLC. Entitlement may be restored for a cash-out refinance of active VA-guaranteed loans when ordering or correcting the Certificate of Eligibility (COE). Use this ink for instructions: https://www.benefits.va.gov/homeloans/documents/docs/lender_coe_tutorial.pdf
1.04.03 Ineligible Borrowers
1.04.03.01 Non-natural Borrowers Non-natural Borrowers including LLC’s, Corporations, Trusts, Inter-vivo revocable trust.
Section 1.04 Borrower Eligibility Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 28 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.04 Borrower Eligibility 1.04.03.02 Foreign Nationals Foreign nationals who have no lawful residency status in the U.S. are not considered to be non-permanent resident aliens and are not eligible for financing.
1.04.03.03 Diplomatic Immunity Due to the inability to compel payment or seek judgment, transactions with individuals who are not subject to United States jurisdiction are not eligible. This includes embassy personnel with diplomatic immunity. Verification the borrower does not have diplomatic immunity can be determined by reviewing the visa, passport or the U.S. Department of State's Diplomatic List at http://www.state.gov/s/cpr/rls/.
1.04.04 Non-Occupant Co-Borrowers Non-occupant co-borrowers are not eligible for VA loans.
1.04.05 Power of Attorney (POA) All POA’s used by the borrower(s) on the loan must be pre-approved by the Underwriter and may not be allowed to close without underwriter approval. POA’s must be reviewed by all departments involved for accuracy up to and including Processing, Underwriting and Closing.
POA’s used by the seller, realtor or other parties to the transaction, may be requested but do not need approval by FCM. Other POA Requirements are listed below:
• Date of POA cannot be dated more than 180 days from the closing date. • POA must be fully-executed. • POA must not be expired on the date of the closing. • Specific POA: A specific power of attorney or other document(s) signed by the Veteran, which encompasses the elements below.
o Entitlement: A clear intention to use all or a specified amount of entitlement. o Purpose: A clear intention to obtain a loan for purchase, construction, repair, alteration, improvement, or refinance. o Property Identification: Identification of the specific property. o Price and Terms: The sales price, if applicable, and other relevant terms of the transaction. o Occupancy: The Veteran’s intention to use the property as a home to be occupied by the Veteran (or other applicable VA occupancy requirement or spouse and/or guardian for dependent child(ren)).”
Section 1.04 Borrower Eligibility Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 29 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.04 Borrower Eligibility • Digital signatures can be accepted as an original signature or wet signature as defined by the Electronic Signatures in Global and National Commerce Act, commonly referred to as the E- sign Act. • Grantor’s Names must be as they will appear on closing documents. • A separate POA must be used for each borrower unless the borrowers are married. • The Attorney in Fact cannot have a financial interest in the transaction (i.e. Realtor, Broker, LO, Closing Attorney) • When using a POA for closing, the borrower’s signature must be on the Uniform Residential Loan Application (1003), the initial disclosures and the sales contract/purchase agreement. • A military POA is considered a general POA and is only valid during the Active Duty Servicemembers’ (ADSM) period of deployment, not to exceed 1 year. • The Veteran’s attorney-in-fact must use this POA to apply for a Certificate of Eligibility (COE) and initiate processing of a loan on behalf of the Veteran.
1.04.05.01 Alive & Well (Not Missing in Action) Certification o It must always be verified that the veteran is alive at the time of closing, whether or not the veteran is still in the military. If the veteran is in the military, it must also be verified that the veteran is not missing in action (MIA). o The following certification must be made:
. “The undersigned lender certifies that written evidence in the form of correspondence from the veteran or, if on active military duty, statement of his or her commanding officer (including statement of person authorized to act for said officer), affirmatively indicating that the veteran was alive and, if the veteran is on active military duty, not missing in action on (date), was examined by the undersigned and that the said date is subsequent to the date the note and security instruments were executed on the veteran’s behalf by the attorney-in-fact.”
o VA has no objection to e-mail verification if the e-mail is identifiable as having come from a military installation, ship, etc and complies with all applicable provisions as stated. o In this case of a deployed veteran cut off from communications, VA expects lenders to make an attempt to obtain information to make the certification. However, if the necessary information is unobtainable, VA will accept documentation of their efforts and guaranty the loan.
Section 1.04 Borrower Eligibility Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 30 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.04 Borrower Eligibility
o The documentation must demonstrate that the lender made a good faith, bona fide effort (i.e., contacted home base of employed veteran, copy of returned email, etc.). It is not sufficient to only notate that “the veteran’s spouse said he/she cannot contact the veteran.”
1.04.06 CAIVRS and LDP/GSA Borrowers must pass screening through federal Credit Alert Verification Report System (CAIVRS).
In addition, all of the following parties to the transaction must be checked on the HUD Limited Denial of Participation (LDP) and Excluded Parties List System (EPLS/GSA) lists:
• Borrower(s) • Seller(s) • Buyers’ and Sellers’ agents • Builders • Closing Agents • Brokers • Loan Originators • Power of Attorney • Processor (Broker Side of Business
1.04.07 Social Security Number Verification All borrowers, including United States citizens, must have a valid Social Security Number (SSN) and must provide evidence of that SSN. Tax ID numbers issued by the Social Security Office are unacceptable. Any credit report used in the file must indicate that a Social Security validation vendor has validated the borrower’s Social Security Number.
Social Security Number verification may be documented using any of the following:
• W-2, paystub, etc. • Copies of social security cards • Direct verification through the Social Security Administration (SSA) • Tax Transcripts (this is not a viable option on IRRRLs)
Note: These requirements apply to purchase money loans and all refinances, including IRRRLs.
Section 1.04 Borrower Eligibility Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 31 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.05 Employment & Income
1.05 Employment & Income
1.05.01 Overview Income may not be used in calculating the borrower’s debt-to-income ratios if it comes from any source that cannot be verified, is not stable, or will not continue.
Loans that receive an Accept or Approve can generally follow the documentation requirements found in the Automated Underwriting System’s (AUS) findings. It falls to the underwriter to determine if the AUS is correctly reading and accounting for the income situation on any given file.
1.05.02 Length of Employment All borrowers with qualifying income must have an acceptable and stable employment history to be considered effective income for qualifying purposes. Borrowers do not need to be in their current job for two years but must be able to show a verifiable two-year work history.
1.05.02.01 Gaps in Employment A letter of explanation is required on all gaps of employment exceeding 30 days. Allowances for seasonal employment, where applicable, may be documented.
1.05.02.02 College Transcripts College transcripts may be used in some circumstances to meet the 2 year employment history requirement for wage earners. Diplomas are not necessary and will not satisfy the condition.
1.05.02.03 Extended Absences An extended absence is defined as any job gap greater than 6 months. If the borrower is just returning to the work force following an extended absence, the borrower’s income may be considered only if the following conditions are met:
• Borrower is employed at his/her current job for at least 6 months • Borrower can document 2 year work history prior to absence from work force
1.05.03 Salaried or Hourly Wage Earner
1.05.03.01 Documentation Requirements Minimum income documentation required for salaried or hourly wage earners is determined by AUS findings unless the loan is being manually underwritten. Generally, the AUS findings for salaried or hourly wage earner income is as follows:
Section 1.05 Employment & Income Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 32 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.05 Employment & Income The most recent year-to-date pay stub documenting one full month’s earnings and any one of the following to verify current employment:
• Written verification of employment; • Verbal verification of employment; or • Electronic verification acceptable to FHA
Paystubs and W-2s should:
• Clearly identify the employer’s name • Clearly identify the borrower as the employee • Be computer-generated or typed by the borrower’s employer • Be complete and legible • Contain year-to-date earnings (paystubs) • Contain one full month’s earnings at a minimum (paystubs)
Handwritten paystubs are allowed provided a copy of the cancelled checks covering a 30 day period is reviewed by underwriting along with a full Verification of Employment.
Use of employment verification services is acceptable as long as it has the same information as the “full” verification generated through the “Work Number”. A current paystub is not required with an automated employment verification service. The lender MAY NOT charge a fee to obtain the employment verification information.
1.05.03.02 Additional Notations Teachers must have a full VOE completed in order to determine the proper pay schedule unless the pay schedule can be deduced from existing documentation.
Additional documentation for a borrower(s) employed in building trades or other seasonal or climate-dependent work must provide, in addition to the standard documentation (VOE and pay stub(s)), the following:
(a) Documentation of the borrower’s total earnings year-to-date, (b) Signed and dated individual income tax returns for the previous 2 years, and (c) If borrower works out of a union, evidence of the union’s history with the borrower.
Salaried or Hourly Wage Earners cannot own 25.00% or more interest in the business.
Section 1.05 Employment & Income Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 33 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.05 Employment & Income
1.05.04 Military Income Sources
1.05.04.01 Active Military Verification Analysis: An original military Leave and Earning Statement (LES) dated no more than 120 days prior to the Note is required in place of a VOE. Determine if the service member is within 12 months of release from active duty or end of the contract term. If the date is within 12 months of the anticipated loan closing date, obtain any of the following:
o Documentation that the service member has already re-enlisted or extended his/her period of active duty to a date beyond the 12 month period following the projected closing of the loan, or
o Verification of a valid offer of local civilian employment and/or verification of military retirement income following the release from active duty. All data pertinent to sound underwriting procedures (date employment will begin, earnings, and so on) must be included, or
o A statement from the service member he/she intends to re-enlist or extend the period of active duty to a date beyond the 12-month period plus:
. A statement from the service member’s commanding officer confirming the service member is eligible to re-enlist or extend his/her active duty, and . That the commanding officer has no reason to believe that the re- enlistment or extension of active duty will not be granted, or
o Documentation of strong mitigating factors such as:
. A down payment of at least 10% from the borrower’s own funds (not a gift) . Minimum of 6 months PITI cash reserves after the down payment from borrower’s own assets (not a gift), or . Clear evidence of strong ties to the community coupled with a nonmilitary spouse’s income high enough that only minimal income from the active duty service member is needed to qualify.
If an Officer has an ETS date listed as 888888 or 000000 on his or her LES, the above documentation is not required unless there is evidence that the Officer has resigned his or her commission
Section 1.05 Employment & Income Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 34 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.05 Employment & Income
1.05.04.02 Subsistence and Clothing Allowances Verification Analysis: Verified allowances may be included as effective non-taxable income (Tax-free income may be “grossed up” only for calculating the debt-to-income ratio, not residual income. Do not add non-taxable income to taxable income before “grossing up.”). Subsistence (rations) and clothing allowances are indicated on the LES.
1.05.04.03 Military Quarters Allowance Verification Analysis: Military quarters allowance may be included as effective nontaxable income if properly verified. In most areas, there will be an additional variable housing allowance that can also be included. Verification of Military Quarters Allowance income may be obtained from the borrower’s LES, or on Military.com under Benefits on the Basic Allowance for Housing (BAH) Rate Tables (amount must be verified based on geographic duty, location, pay grade, and dependency status), or on the Department of Defense website.
1.05.04.04 Other Military Allowances Verification Analysis: To consider a military allowance in the underwriting analysis, obtain verification of the type and amount of the military allowance and how long the veteran has received it. These types of pay are subject to periodic review and/or testing of the recipient to determine eligibility. These allowances are considered taxable income. These allowances may be included in effective income only if it is expected to continue because of the nature of the veteran’s assigned duties; for example, flight pay for a verified pilot. Examples include flight or hazard pay, overseas pay, and combat pay.
1.05.04.05 Voluntary Separation Payments Verification Analysis: Special Separation Benefit (SSB):
• A one-time lump sum. • Taxable in the year received. • Treat as any substantial cash reserve.
Voluntary Separation Incentive (VSI):
• Annual payments. • Include in effective income. • Taxable in the year received. • Payment period is calculated by multiplying the veteran’s years of service time two.
Section 1.05 Employment & Income Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 35 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.05 Employment & Income
• Available only to veterans with six or more years of service (equating to a minimum of 12 years annual payments).
1.05.04.06 Reserves or National Guard Income Income from service in the Reserves or National Guard may be included in effective income if the length of the veteran’s total active and Reserve/Guard service indicates a strong probability that the Reserve Guard income will continue. Otherwise, this income may be used to offset obligations that have 6 to 24 months duration.
1.05.04.07 Recently Activated Reserve or National Guard Every veteran whose income is being used to qualify for a loan must be asked if their income is subject to change due to participation in a Reserves/National Guard unit due to activation. If the resulting impact of unit activation on the reservist’s income will be:
• Reduced: Carefully evaluate the impact the reduction may have on the veteran’s ability to repay the loan. • Increased: Consider the likelihood the income will continue beyond a 12-month period.
Carefully and thoroughly document, including reasons for using/not using reserve/guard income, these situations on the VA Form 26-6393 - VA Loan Analysis, or on a separate memorandum to the file.
If an activated Reserves/National Guard member applies for a loan, they must present orders indication their current active duty tour is not to exceed 12 months.
There are not any clear-cut procedures that can be applied to all cases. Evaluate all aspects of each individual case, including credit history, accumulation of assets, overall employment history, and make the best decision for each loan regarding the use of income in qualifying for the loan.
It is very important that loan files be carefully and thoroughly documented, including any reasons for using or not using Reserve/National Guard income in these situations.
1.05.05 Self-Employed A borrower is considered self-employed if they own 25.00% or more interest in a business or if they are a 1099 employee which files a Schedule C. The four basic types of business structures are: sole proprietorships, corporations, limited liability or “S” corporations, and partnerships.
Section 1.05 Employment & Income Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 36 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.05 Employment & Income
1.05.05.01 Documentation Requirements • The borrower must provide two years of individual federal tax returns and corporate partnership federal tax returns (if applicable to business). In certain situations where the AUS is only requiring one year tax return the underwriter has the discretion in determining the need for the additional tax year’s documentation. • If the business is a corporation or partnership a list of all stockholders or partners showing the interest each holds in the business must be provided. • A profit and loss statement (P&L) and a balance sheet is required if more than one- half of the tax year has passed to verify current income and stability of the income on manual UWs. • For additional requirements regarding Tax Transcripts and returns please see the IRS Tax Transcript Requirements section.
FCM Verbal VOE requirements for Self-employed Borrowers:
• The existence of the borrower’s business must be verified by a third party, such as a CPA, regulatory agency, or the applicable licensing bureau if possible. • The borrower’s business address and phone listing must be verified by using a telephone book, the internet or directory assistance. • If the contact is made verbally, then a Verbal Verification of Employment must be completed to document the source of the information. The VVOE form must indicate the title of the individual verifying the employment. • CPA letters must be dated within 30 days of the NOTE date
Due to latency in system updates or recertifications using annual licenses, certifications, or government systems of record, verification the Borrower’s business is open and operating must be obtained within 20 business days prior to the note date.
Below are examples of methods allowed for verifying borrower’s business is currently operating: • Evidence of current work (executed contracts or signed invoices indicating the business is operating on the day of verification); • Evidence of current business receipts within 20 days of the note date(payment for services performed); • Lender certification the business is open and operating (lender confirmed through a phone call or other means); or • Business website demonstrating activity supporting current business operations (timely appointments for estimates or service can be scheduled)
1.05.05.02 History
Section 1.05 Employment & Income Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 37 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.05 Employment & Income Self-employed borrowers are required to have a minimum of 2 years consecutive self- employment in the same business and geographic area.
1.05.05.03 Analysis FCM requires self-employed income to be calculated using Fannie Mae Cash Flow Analysis Form 1084.
Business income is averaged over a two-year period using Federal Tax Returns.
In the case of declining income, significant compensating factors must exist to consider the income in the qualifying ratios. A significant decline in income is not acceptable, even if the current income and debt ratios meet agency guidelines.
Depreciation claimed as a deduction on the tax returns and financial statements of the business may be included in effective income.
Business or roll over losses must be considered from all tax returns.
What is reported to the IRS on a joint return must be used when applying for a federally guaranteed loan.
On a joint tax returns, the loss must be deducted from the borrower’s income in both community and non-community property states.
On a joint tax returns, when a borrower and a co borrower have been faced with business losses, the Veteran/borrower and his/her spouse may want to consider both being on the loan in order to potentially qualify. The correct of both borrowers will be considered.
(1) Business Types for Self-Employed Borrowers Sole Proprietorships: the total net profit of the business with depreciation or depletion added back to the adjusted gross income.
Partnerships: the amount of the draw or bonus taken from the capital account plus the borrower’s share of the net profit.
Corporations: the amount of wages or salary as shown on the W-2 plus any bonus or other compensation, deducting any spousal income.
1.05.06 Commission Income Commission income may be considered only if evidence of all of the following is provided:
Section 1.05 Employment & Income Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 38 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.05 Employment & Income • The borrower must furnish the most recent two years’ Federal tax returns, along with his/her most recent pay stub. • The commission income must be averaged over that two year period. • Any un-reimbursed business expenses must be deducted from the borrower’s income.
Commission income showing a decrease requires significant compensating factors to justify loan approval.
1.05.07 Rental Income
1.05.07.01 Eligible Properties Rental income is an acceptable source of stable income if it can be established that the income is likely to continue.
If the rental income is derived from the subject property, the property must be a two- to four- unit principal residence property in which the borrower occupies one of the units. In addition, cash reserves totaling at least 6 months mortgage payments and documentation of the applicant’s prior experience managing rental units or other background involving both property maintenance and rental is required.
If the income is derived from a property that is not the subject property, there are no restrictions on the property type, however there are specific reserve requirements. For example, rental income from a commercial property owned by the borrower is acceptable if the income otherwise meets all other requirements (it can be documented in accordance with the requirements below).
1.05.07.02 Ineligible Properties Rental income from the borrower’s principal residence (a one-unit principal residence or the unit the borrower occupies in a two- to four-unit property) or a second home cannot be used to qualify the borrower.
Boarder income is not an acceptable source of income.
1.05.07.03 General Requirements for Documenting Rental Income Each Property must have a 2-year rental history itemized on the borrower’s tax returns.
Property depreciation claimed as a deduction on the tax returns may be included in effective income.
If after adding depreciation to the negative rental income, the borrower still has rental loss,
Section 1.05 Employment & Income Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 39 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.05 Employment & Income
the negative income should be deducted from the overall income as it reduces the borrower’s income.
If rental income will not, or cannot be used, then the full mortgage payment should be considered and reserves do not need to be considered.
See additional reserve requirements applicable to borrower’s who own investment properties.
1.05.07.04 Rent Loss Insurance Requirement First Community Mortgage requires rent loss insurance to cover at least six months of gross monthly rent when rental income is being used to qualify and the subject property is a 2-4 unit primary residence. Rent loss insurance must be included as part of the hazard insurance policy as an endorsement and included in the yearly premium amount.
1.05.07.05 Conversion of Primary Residence to Investment Property Verification: Obtain a copy of the rental agreement on the property, if any.
Analysis: Use the prospective rental income only to offset the mortgage payment on the rental property and only if there is no indication that the property will be difficult to rent. This rental income may not be included in effective income.
Obtain a working knowledge of the local rental market. If there is no lease on the property, but the local rental market is very strong, the lender may still consider the prospective rental income for offset purposes.
Reserves are not needed to offset the mortgage payment on the property the Veteran occupies prior to the new loan
Section 1.05 Employment & Income Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 40 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.05 Employment & Income
1.05.08 Other Types of Income
1.05.08.01 Alimony, Child Support or Separate Maintenance Alimony, Child Support, or Maintenance income may be considered only if evidence of all of the following is provided:
• Payments are likely to be received consistently for the first three years of the mortgage; • A copy of the divorce decree, legal separation agreement, voluntary agreement, or court order specifying the amount of support and the period of time over which it will be received is required; and • Evidence that the funds have been received for the last 6 months using cancelled checks, deposit slips, Federal tax returns, or court records.
Non-taxable child support income may be grossed up under the same provisions as other non-taxable sources.
Note: If DU or LP show reduced documentation in regards to this type of income then all of the above is required but the reduced duration of evidence of receipt is required instead of six months
Section 1.05 Employment & Income Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 41 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.05 Employment & Income
1.05.08.02 Capital Gains Capital gains or losses generally occur only one time, and should not be considered when determining effective income.
However, if the individual has a constant turnover of assets resulting in gains or losses, the capital gain or loss must be considered when determining the income. Two years’ tax returns are required to evaluate an earnings trend. If the trend:
• results in a gain, it may be added as effective income, or • consistently shows a loss, it must be deducted from the total income.
The lender must document anticipated continuation of income through verified assets.
Example: A lender can consider the capital gains as income for an individual who purchases old houses, remodels them, and sells them for profit.
1.05.08.03 Car Allowances • Only the amount that an auto allowance and/or expense account exceeds actual expenditures can be considered as income. • Income must be documented with the most recent two years’ tax returns. • The employer must verify that the continuance of the allowance. • The borrower’s car payment is treated as a recurring debt and cannot be offset by the car allowance. • If there is a loss between the allowance and actual expenditures, that amount is considered a recurring debt and counted in the total debt ratio. • If the borrower uses the standard per-mile rate in calculating auto expenses, as opposed to the “actual cost” method, the portion that the IRS considers depreciation may be added back to income.
1.05.08.04 Employer Differential Payments If the employer subsidizes a borrower’s mortgage payment through direct payments, the amount:
Section 1.05 Employment & Income Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 42 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.05 Employment & Income
• Is considered gross income, and • Cannot be used to offset the mortgage payment directly, even if the employer pays the servicing lender directly.
1.05.08.05 Employment by Family-Owned Business In addition to normal employment verification, a borrower employed by a family-owned business is required to provide evidence that he/she is not an owner of the business. This evidence may include one of the following:
• a copy Federal personal tax returns, and/or • a signed copy of the Federal corporate tax return showing ownership percentages (usually evidenced on the Schedule K-1), if applicable
In addition to the above items, a current VOE showing the borrower does not own more than 25% of the business is required and any recent increases in income must be closely reviewed.
1.05.08.06 Government Assistance Programs Government assistance in the form of workman’s compensation, welfare programs, payments for foster children, unemployment income, etc. may be used to qualify the borrower.
• Documentation must be provided from the agency paying benefits to verify that the benefits are likely to continue for at least three years after closing. If continuance of such income is not expected for three years, it may be considered as a compensating factor. • Past receipt of unemployment income must be documented for two years. Reasonable assurance of its continuance is also required. This applies to individuals employed on a seasonal basis, such as farm workers, resort employees, etc.
1.05.08.07 Interest and Dividend Income Interest and Dividend Income are acceptable sources of income subject to the following conditions:
• Evidence required showing that the borrower still owns the assets generating the income used to qualify. • Interest and dividend income must be documented as received for the past two years. • A two year average is required to use such income to qualify for the mortgage.
Section 1.05 Employment & Income Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 43 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.05 Employment & Income
• Two years Federal tax returns or account statements must be provided. Funds used for down payment and/or closing costs must be subtracted before the interest is calculated. • Income cannot be counted if the borrower is using the interest-bearing or dividend- producing asset as the source of the down payment or closing costs.
1.05.08.08 Long-Term Disability Income Long-term disability income applies to income received from long-term disability insurance or benefits and does not include income received from the Social Security Administration. Long- Term Disability income must be verified from the third-party source (insurance company, employer, or other qualified disinterested party) to determine:
• The borrower’s current eligibility for the disability benefits, • The amount and frequency of the disability payments, and • If there is a contractually established termination or modification date.
Generally, long-term disability will not have a defined expiration date and must be expected to continue. The requirement for re-evaluation of benefits is not considered a defined expiration date.
If a borrower is currently receiving short-term disability payments that will decrease to a lesser amount within the next three years because they are being converted to long-term benefits, the amount of the long-term benefits must be used as income to qualify the borrower.
Non-taxable disability income may be grossed up under the same provisions as other non- taxable sources.
1.05.08.09 Overtime, Bonus, and Tip Income Overtime, Bonus, and Tip income are acceptable sources of income subject to the following conditions:
• Verified two year history of receiving the income; and • A two year average using Federal Tax Returns unless the income is declining. In the case of declining income, significant compensating factors must exist to consider the income in the qualifying ratios and if considered the lesser of the two-year average or the year-to-date shall be used. • Full VOE showing probability of continuance is required.
Section 1.05 Employment & Income Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 44 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.05 Employment & Income Inconsistency in this type of income from year to year will require additional years to be verified to determine a valid average.
1.05.08.10 Part-Time/Second Job Income If a borrower’s regular employment is less than the typical 40 hour work week, the stability and calculation of that income should be evaluated as you would any another regular, on- going primary employment.
Income from a second job, whether it is full time or part-time, may only be evaluated if it can be verified with an uninterrupted two year history with a strong likelihood of continuance. The only exception to the exclusion of interrupted income is when the job is seasonal and it can be documented that the borrower has worked in the same “seasonal” position for at least the past two years and is expected to be hired again for the next “season”.
Negative income from a second job should be shown on the 1003 as a reduction in income from the primary job, not as secondary line item or “other income”.
1.05.08.11 Retirement Income Retirement income refers to income derived from a privately-held retirement account or an employer-sponsored pension. For information on Social Security Retirement Income please refer to that particular section.
Retirement must be verified from the third-party source (former employer) or from the most recent two years’ Federal tax returns. The income must continue for at least three years after closing; otherwise, it will be used only as a compensating factor.
If the income is paid in the form of a monthly distribution from a 401(k), IRA, or Keogh retirement account, determine whether the income is expected to continue for at least three years after the date of the mortgage application. In addition, the borrower must have unrestricted access without penalty to the accounts and if the assets are in the form of stocks, bonds, or mutual funds, 70% of the value must be used to determine the number of distributions remaining to account for the volatile nature of these assets.
1.05.08.12 Section 8 Home Ownership Vouchers Government subsidies are not eligible for use with any VA loan program or transaction type. This includes, but is not limited to, Section 8 Housing Vouchers.
Section 1.05 Employment & Income Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 45 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.05 Employment & Income
1.05.08.13 Social Security Income ALL income from the Social Security Administration (SSA) including, but not limited to Supplemental Security Income (SSI), Social Security Disability Insurance (SSDI), and Social Security Income can be used to qualify the borrower if the income has been
This income can be documented by any one of the following documents:
• Federal tax returns • The most recent bank statement evidencing receipt of income from the SSA • A Proof of Income Letter, also known as a “Budget Letter” or “Benefit Letter” that evidences income from SSA (Please visit www.ssa.gov for an explanation of types of letters issued by the SSA): or • A copy of the borrower’s Social Security Benefit Statement, SSA-1099/1042S
In addition to verification of income, the lender must document the continuance of this income by obtaining from the borrower
• a copy of the last Notice of Award letter which states the SSA’s determination on the borrower’s eligibility for SSA income, or • equivalent document that establishes award benefits to the borrower (equivalent document). If any income from the SSA is due to expire within three years from the date of mortgage application, that income may only be considered as a compensating factor.
If the Notice of Award or equivalent document does not have a defined expiration date, the income shall be considered effective and likely to continue. Additional documentation should not be requested from the borrower to demonstrate continuance of Social Security Administration income. Under no circumstance may originators inquire into or request documentation concerning the nature of the disability or the medical condition of the borrower.
Note: Pending or current re-evaluation of medical eligibility for benefit payments is not considered an indication that the benefit payment is not likely to continue.
Note: An initial Notice of Award letter (or its equivalent) may specify a start date for receipt of income in the future. Income may be considered as effective income as of the start date specified in the Notice of Award Letter. The borrower must have other income to qualify for the mortgage until the start date for receipt of income.
Section 1.05 Employment & Income Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 46 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.05 Employment & Income Note: Other forms of long-term disability income (such as worker’s compensation or private insurance) may be considered qualifying income with a reasonable expectation of continuance. Lenders should use procedures similar to those noted above to verify such income
1.05.08.14 Trust Income A copy of the Trust Agreement or the Trustee’s statement confirming the amount, frequency and duration of payments must be provided.
• The income must continue for at least three years after closing. • Lump sum distributions made before loan closing may be used for down payment or closing costs if there are verified by a copy of the checks or the Trustee’s letter that shows the distribution amount. If a distribution was made that reduces the Trust income, the reduction must be taken into consideration in computing the income.
1.05.08.15 VA Benefits Income received in the form of VA benefits must be documented by a letter or distribution form from the Veterans Administration.
• The income must continue for at least three years after the closing. (Note that verification is not required for VA retirement or long-term disability benefits.) • Education benefits are not acceptable income, as it offsets education expenses
1.05.09 New Employment Income from a new job the borrower has just started must be documented with a full written VOEs.
1.05.10 Contracts and Offer Letters Contracts and offer letters are acceptable. The offer letter/Contract must not contain any contingencies other than start date (passing drug tests, certifications, licensure etc). If original contract has contingencies, a follow up letter stating contingencies have been cleared is acceptable. A full VOE is required confirming the start date of employment and should match the compensation information given on the offer letter/contract. The start date of employment must be no later than 30 days after the note date.
1.05.11 Non-Taxable Income Non-taxable income (or any portion of) may be “grossed-up” by using the published IRS tax tables 125%.
Section 1.05 Employment & Income Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 47 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.05 Employment & Income
1.05.12 Temporary Leave/Short Term Disability Temporary leave from an employer may encompass various circumstances (e.g., family and medical, short-term disability, maternity, other temporary leaves with or without pay). Temporary leave is generally short in duration. The period of time that a borrower is on insurance policy and/or benefit terms. Leave ceases being considered temporary when the borrower does not intend to return to the current employer or does not have a commitment from the current employer to return to employment. A loan should not be denied specifically because a borrower is on temporary leave or short-term disability.
1.05.12.01 Documentation Requirements for Temporary Leave/Short Term Disability Documentation must be provided from the current employer confirming the following:
• Borrower’s statutory right to return to work (or the employer’s commitment to permit the borrower to return to work) and • Borrower’s confirmed date of return, and • Borrower’s post-leave employment and income and • Written statement signed by the borrower confirming that the borrower will return to current employer and stating the confirmed date of return that has been agreed upon between the borrower and the employer.
In addition, if the borrower is returning to the current employer AFTER the first mortgage payment is due the following additional documentation is required:
• Documentation evidencing amount, duration and consistency of all temporary leave income sources being used to qualify the borrower (e.g., short-term disability benefits or insurance, sick leave benefits, temporarily reduced income from employer) that are being received during the temporary leave and • All available liquid assets used to supplement the reduced income for the duration of the temporary leave must meet the requirements found below and be verified and • Written rationale explaining the analysis used to determine the qualifying income.
Section 1.05 Employment & Income Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 48 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.05 Employment & Income
1.05.12.02 Determining Qualifying Income for Temporary Leave/Short Term
(1) Borrowers returning to their current employer PRIOR to the first
mortgage payment due date: Qualifying income from the borrower’s gross monthly income amount that will be received upon the borrower’s return to the current employer may be used.
(2) Borrowers returning to their current employer AFTER the first mortgage payment due date: Qualifying income used must be the lesser of the qualifying income amount that will be received upon the borrower’s return to the current employer or the borrower’s gross monthly income being received for the duration of the temporary leave. In the event that the income has been reduced or interrupted, available liquid assets may be used as a partial or complete income supplement up to the amount of the income reduction. Assets that are required for the transaction (e.g., down payment, Closing Costs, Financing Costs, Prepaids/Escrows and reserves) may not be considered as available assets in determining the supplemental income amount.
Total qualifying income = lesser of (supplemental income + temporary leave income) or (qualifying income received after borrower’s return to work)
Supplemental income = available liquid reserves divided by the number of months from the first mortgage payment due date to the date the borrower will begin receiving his or her regular employment income, rounded up to the next whole number.
1.05.13 Income Types Not Addressed Income types not specifically addressed in this guide will be evaluated on a case-by-case basis by underwriting management.
1.05.14 Unacceptable Sources of Income The following types of income are unacceptable for qualifying purposes:
• Trailing Spouse Income • Boarder Income • Education Benefits • Per Diem Income
Section 1.05 Employment & Income Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 49 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.05 Employment & Income • Gambling Income • Non-verifiable Income • Unstable Income • Projected Income • Reverse Mortgage Income • Income from Foreign Employers not included on US Federal Tax Returns
1.05.15 4506-C Requirements A fully executed IRS Form 4506-C must be included in all loan files.
1.05.16 IRS Tax Transcript Requirements Tax transcripts are required to validate all borrower income. Transcripts may be ordered according to the income received by the borrower.
Full 1040 Transcripts will always satisfy the Tax Transcripts requirements – however, for certain income types, lesser transcripts may be acceptable:
Income Type Transcript Type Borrower is qualified based on W-2 income NONE (Salary, Bonus, Overtime and Commission less than 25%). Borrower has no rental income, alimony or other evidence taxes would be required to accurately assess income or liabilities. 1099 Income for Pension or Social Security NONE Income Income inclusive of Commission greater than Full IRS 1040 Transcripts 25% Self Employed Income (Schedule C, K-1, W-2 Full IRS 1040 Transcripts where borrower owns more than 25%) Rental Income Full IRS 1040 Transcripts Capital Gains Dividend Income
If tax transcripts are obtained the borrower is not required to sign the tax returns with the exception of JUMBO products.
Tax Transcript requirements can change based on the application date and whether an extension has been filed.
Section 1.05 Employment & Income Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 50 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.05 Employment & Income Note that Tax Transcripts are not an adequate substitute for Tax Return Schedules and should only be used to support the validity of the actual Tax Returns. In instances in these guidelines where it is specified that Tax Returns are required, actual Tax Returns including all schedules should be provided.
1.05.16.01 Documentation requirements for Self-Employed income when an extension has been filed: Self Employed borrowers will need P&L and Balance Sheet if more than a calendar quarter has elapsed since date of most recent calendar or fiscal-year end tax return was filed by the borrower – with no exceptions.
Additionally, if income used to qualify self-employed borrower exceeds a two-year average, an audited Profit and Loss Statement or signed quarterly tax returns obtained from the IRS are required. Additional requirements are determined by the application date.
Application Date between Jan 1st – June 14th:
• Most recent year(s) available tax transcripts for the number of years required • Prior calendar year W-2s for a corporation • Prior calendar year 1099s for commission income • After April 17th, copy of filed extension for prior calendar year with any tax payment made, if applicable. Must also have IRS notification of “no record found”
Application Date between June 15th to October 14th:
• Most recent year(s) available tax transcripts for the number of years required • Copy of the filed extension for the prior calendar year with any tax payments made • Prior calendar year year-end profit and loss statement • IRS notification of “no record found” for prior calendar year • Prior calendar year W-2s for corporations • Prior calendar year 1099s for commission income
Application Date between October 15th to November 14th:
• Most recent year(s) available tax transcripts for the number of years required • Copy of the filed extension for prior calendar year with any tax payments made • Copy of the prior calendar year tax returns • IRS notification of “no record found” for prior calendar year
Section 1.05 Employment & Income Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 51 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.05 Employment & Income Application Date after November 15th:
• Most recent year(s) available tax transcripts for the number of years required • Copy of the filed extension for prior calendar year with any tax payments made • Copy of the prior calendar year tax returns • Transcripts from the IRS to verify the prior calendar year tax returns (regardless of the type of income used to qualify)
1.05.16.02 Documentation requirements for Self-Employed income when tax returns have been filed Application Date between Jan 1st – June 14th:
• Most recent year(s) available tax transcripts for the number of years required by AUS • Copy of the prior calendar year tax returns • Must have IRS transcripts of prior calendar year tax returns if using income to qualify
Application date on and after June 15th:
• Must have IRS transcripts of prior calendar year tax returns
1.05.16.03 FCM Documentation requirements for Salaried Borrowers Application date on and after June 15th:
• Must have IRS transcripts of prior calendar year tax returns
1.05.16.04 SSN Misuse for Tax Filing Purposes IRS tax transcripts may not match loan documentation due a borrower’s SSN being used fraudulently by another individual for tax filing purposes.
If IRS tax transcripts cannot be obtained or do not agree with income documentation, FCM advises the following action steps:
• Obtain 6C Record of Account • Obtain and execute a Social Security Consent form to validate the borrower’s SSN. • If the borrower is a wage earner, order W-2s transcripts from the IRS to support the income documentation received. If there is 1099 income, order the 1099 transcripts. • If the borrower is a non wage earner, request prior year 1040s to compare against current income documentation received. This is used to see if the borrower’s current
Section 1.05 Employment & Income Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 52 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.05 Employment & Income income is consistent with the prior year. If the borrower’s SSN misuse has occurred over multiple tax filing years, this action step will not work. • The borrower should be advised that there is a discrepancy with their tax information and the IRS. Once the borrower has gone to the IRS documentation should be requested. The IRS or a tax advocate will issue a letter acknowledging the case and at that point the IRS will most likely explain to them they have been a victim of identity theft. This letter must be validated by the party which completed it. There is usually a contact phone number in the letter. The phone number should be reverse searched prior to calling to verify the number goes to the IRS or tax advocate. • The IRS should confirm that revised returns are not being accepted for the borrower until the conclusion of the identity theft case. If the IRS is accepting the borrowers’ modified tax returns then a copy of the revised returns, stamped by the IRS, should be provided in addition to the information outlined above.
It should be noted that FCM must still have a reasonable and verifiable justification for all income calculations used to determine the final qualifying income. If sufficient valid documentation is not available and an income determination cannot be made the income may not be used to qualify the borrower.
1.05.17 Amended Tax Returns For Borrowers who have recently amended their tax returns, the following will apply: • If the borrower qualified based on the original return filed and/or the amendment was clerical in nature the income is acceptable on the amended tax returns. OR • If the borrower would not have qualified based on the original return filed and the income increased such that the borrower will qualify based on amendment, the borrower must wait 6 months prior to loan application from the date of the amendment.
1.05.18 Residual Income The VA qualifies the veteran borrower on a single ratio (no housing ratio), as well as residual income. Residual income is the balance available for family living expenses after deducting income and social security taxes, debts, job related expenses, obligations, and monthly shelter expenses from the borrower’s income.
Section 1.05 Employment & Income Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 53 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.05 Employment & Income
1.05.18.01 Family Size Residual income calculations are based on family size. All members of the veteran’s household, regardless of the nature of the relationship, are included in determining family size, including a spouse who will not be on the title or obligated on the note and children of a spouse’s previous marriage who reside with the veteran.
Individuals who are fully supported from a source of verified income which, for whatever reason, is NOT included in effective income on the VA Loan Analysis form may be omitted from the family size total. For example:
• A spouse not obligated on the Note who has stable and reliable income sufficient to support his or her living expenses, or • A child for whom sufficient foster care payments or child support is received regularly.
1.05.18.02 Calculating Residual Income Residual income equals gross income less the following items listed below:
• Principal, Interest, Taxes & Insurance (PITI) • HOA • Maintenance and utilities1 • Federal, state and social security taxes2 • Revolving and installment debts • Alimony/child support • Job related expenses (child care expenses, travel, meals, etc.) • Negative rental income
1 VA has established a nationwide figure for maintenance and utility costs. All states should use a calculation of 14 cents per square foot of the gross living area for maintenance and utilities combined.
2 In order to calculate taxes generally underwriting will use either the tax tables provided by the IRS or a third party paycheck/payroll calculator such as www.paycheckcity.com.
1.05.18.03 Residual Income Table and Region Table Family Northeast Midwest South West Size Loan amounts of $79,999 and below 1 $390 $382 $382 $425 2 $654 $641 $641 $713
Section 1.05 Employment & Income Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 54 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.05 Employment & Income
3 $788 $772 $772 $80 9 4 $888 $868 $868 $967 5 $921 $902 $902 $1,004 Note: For families of more than five members, add $75 for each additional member up to a family of seven. Family Northeast Midwest South West Size Loan amounts of $80,000 and above 1 $450 $441 $441 $491 2 $755 $738 $738 $823 3 $909 $889 $889 $990 4 $1,025 $1,003 $1,003 $1,117 5 $1,062 $1,039 $1,039 $1,158 Note: For families of more than five members, add $80 for each additional member up to a family of seven. Region States Northeast Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Vermont. Midwest Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, Wisconsin. South Alabama, Arkansas, Delaware, District of Columbia, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, Oklahoma, Puerto Rico, South Carolina, Tennessee, Texas, Virginia, West Virginia West Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington, Wyoming
1.05.19 Unreimbursed Employee Business Expenses
• Due to changes to the tax law, 2106 tax forms are no longer required to be reviewed for commission borrowers. They are only required to be reviewed for Armed Forces Reservist, qualified performing artists, fee-basis state or local officials and employees with impairment- related work expenses. Those are the only types of expenses that are reportable.
Section 1.05 Employment & Income Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 55 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.06 Assets & Reserves
1.06 Assets & Reserves All assets entered in DU or LP must be verified regardless of their use as cash to close or to fulfill reserve requirements.
1.06.01 Cash on Hand Cash on hand is not an acceptable source of funds for reserves or closing costs.
1.06.02 Checking and Savings Accounts and Certificates of Deposit Checking, Savings, and Certificate of Deposits must be verified with one of the following:
• Verification of Deposit (VOD) showing current and average balance • Most recent two months statements to include beginning and ending balances. If AUS is only requiring one month statement it falls to the underwriter to determine the need for the second statement. • Most recent quarterly statement, if received quarterly • Online printouts covering 60 days must show all the information on a normal bank statement as well as the http web address at the bottom or top of the page
In addition to cash to close and required reserves, bank statements will be reviewed for undisclosed debt, overdraft/nsf activity and large deposits. Any indication of undisclosed debt (ie. IRS Tax payments, child support/alimony) will require documentation and explanation of the payments made on the bank statement. Overdraft/NSF activity can be an indicator of financial mismanagement and credit risk; Overdrafts/NSF activity may require explanation and if severe, could warrant a decline. See the Large Deposit section for documentation requirements.
Bank Statements are required to contain, at a minimum, the following information:
• Account Number • Account Holder Name • Account Holder Address • Beginning and Ending Balance • All pages • Blacked-out information is not acceptable • Bank printouts must cover at least 60 days and must be signed and stamped by a Bank Representative.
Section 1.06 Assets & Reserves Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 56 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.06 Assets & Reserves 1.06.03 Stocks, Bonds, and Mutual Funds Stocks, Bonds, and Mutual Funds must be verified with all of the following:
• The most recent monthly or quarterly statement provided by the stockbroker or financial institution managing the portfolio to verify the value of stocks and bonds. • The borrower’s actual receipt of funds must be verified and documented.
When used for reserves, the value of the stocks, bonds and mutual funds must be discounted by 30% but proof of actual liquidation is not required.
1.06.04 Retirement Accounts (Employer Held) Retirement funds must be verified with all of the following:
• Copy of the most recent retirement account statement. • Evidence that the account allows for withdrawals for conditions other than those related to the borrower’s employment or death. • Evidence of liquidation is required if the funds are being used for closing.
When calculating the asset value of retirement accounts, 60% of the borrower’s vested interest in the account may be used unless the borrower provides documentation that a higher percentage may be withdrawn after subtracting any federal income tax and withdrawal penalties.
Any outstanding loans on the retirement account must be subtracted from the principal balance before using them as an asset.
1.06.05 Retirement Accounts (Privately Held) Retirement funds must be verified with all of the following:
• Copy of the most recent retirement account statement. • Evidence of liquidation is required if the funds are being used for down payment or closing costs.
When calculating the asset value of retirement accounts, 60% of the value of the account may be used unless the borrower provides documentation that a higher percentage may be withdrawn after subtracting any federal income tax and withdrawal penalties.
Section 1.06 Assets & Reserves Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 57 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.06 Assets & Reserves 1.06.06 Gift Funds
1.06.06.01 Overview Gift funds from an eligible donor may be used for 100% of the borrower’s closing costs, and down payment. Gift funds cannot be used for reserves.
A sample gift letter can be found by clicking the hyperlink. The source of the donor’s gift funds must be verifiable.
1.06.06.02 Eligible Donors Eligible donors include the following:
• Federal/State/Local government agency or instrumentality. • Family member. • Close friend with a clearly defined and documented interest in the borrower. • Corporation established for humanitarian, welfare, or charitable purposes • Borrower’s employer or labor union.
The gift funds may not be provided, either directly or indirectly, by a person or entity with an interest in the transaction, such as a realtor, seller, or builder. Gifts from these entities are considered inducements to purchase and must be subtracted from the contract sales price.
If a gift is being provided by a nonprofit, government entity or other business entity, the following is required:
• Employer Identification Number (EIN) must be noted in the appropriate line(s) of the “Mortgage Information” section of the FHA Loan Underwriting and Transmittal Summary (HUD-92900-LT). • The correct provider box must be marked below the space where the EIN is entered. • When the “Other” box is marked as the provider of secondary financing, the type of provider (i.e. employer, labor union) must also be identified.
1.06.06.03 Documentation Requirements The following documentation is required to document gift funds:
• A gift letter with donor’s and borrower’s signature that specifically states the following information:
Section 1.06 Assets & Reserves Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 58 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.06 Assets & Reserves
o The donor’s name, address, telephone number, and relationship to the borrower
o The exact dollar amount of the gift funds o The address of the subject property o No repayment is necessary o The donor’s signature o The statement: “Our signatures above indicate that we fully understand that it is a Federal Crime punishable by fine, imprisonment, or both to knowingly make any false statement concerning any of the above facts as applicable under the provision of Title 18, United States Code, Section 1012 and 1014.”
• If the gift funds transfer before closing, the following documentation is required:
o A copy of the donor’s canceled check or other withdrawal document showing that the withdrawal is from the donor’s account, and
o The borrower’s deposit receipt and bank statement showing the deposit. o Any large deposits may need to be sourced
• If the gift funds are transferred at closing, the following documentation is required:
o The closing agent’s receipt of the gift funds from the donor o Checks and cashier’s checks may be made payable to the title company or the borrower.
o If the donor borrowed the gift funds and therefore cannot provide the documentation from their bank account, the donor must provide evidence that those funds were borrowed from an acceptable source (i.e. a party without interest in the transaction). Funds borrowed by the donor are acceptable so long as the borrowers are not obligors on any note used to secure the borrowed funds.
o If the transfer of funds was by a cashier’s check, money order, official bank check or wire the donor will need to provide proof of availability and withdrawal of funds.
For Example
• Gift Letter and Wire Confirmation showing donor’s account • Gift Letter and Cashier’s Check showing withdrawn off donors account
Section 1.06 Assets & Reserves Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 59 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.06 Assets & Reserves 1.06.07 Gift of Equity Gift of Equity is only allowed on new construction and only to reduce the sales price. Not allowed for down payment and closing costs.
1.06.08 Proceeds from the Sale of Property Proceeds from the sale of other property may be used to fulfill cash to close requirements if the sale occurs on or before the closing of our transaction.
A preliminary Closing Disclosure must be provided to in order to determine the estimated proceeds from the sale for qualification purposes.
A final Closing Disclosure must be provided prior to the closing of our transaction to confirm the borrower’s receipt of proceeds.
1.06.09 Borrowed Funds Borrowed funds may only be used to fulfill cash to close and down payment requirements if satisfactory evidence is provided that the funds are fully secured by investment accounts or real property (i.e. cars, trucks, boats) and the borrower can qualify with the repayment. This payment must be included in the borrower’s debt ratio.
1.06.10 Earnest Money Deposit The earnest money deposit amount and source of funds must be verified with the following documentation:
• A copy of the canceled check (front and back). • A bank statement reflecting cleared funds.
1.06.11 Contributions by Interested Parties Sales concessions cannot exceed 4% of the established reasonable value of the property (NOV).
• Seller contributions such as normal discount points and payment of the buyer’s closing costs will not be considered a concession for purposes of determining this limit. • Seller concessions totaling more than 4% must be subtracted from the purchase price in determining LTV. • Seller concessions include payment by the seller of the borrower’s VA Funding Fee, prepaid taxes and insurance, gifts such as microwave, extra discount points paid to provide
Section 1.06 Assets & Reserves Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 60 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.06 Assets & Reserves permanent interest rate buydowns and payoff of credit balances or judgments on behalf of the buyer.
1.06.12 Seller-Funded Down Payment Assistance Seller-Funded Down Payment Assistance is not permitted.
1.06.13 Ineligible Funds All of the following are unacceptable source of funds:
• Foreign Assets • Unsecured Borrowed Funds • Seller Funded Down Payment Assistance • Sweat Equity • Undocumented funds • Cash on hand • Illegally obtained funds
1.06.14 Large Deposits A large deposit is defined as any single deposit non-payroll deposits or VOD variances that represent amounts in excess of 2% of the purchase price. All deposits exceeding this threshold are subject to explanation and source documentation.
The Loan amount shall be used in lieu of purchase price for all refinance transactions.
1.06.15 Reserve Requirements VA does not require the applicant to have additional cash to cover a certain number of mortgage payments, unplanned expenses, or other contingencies in most circumstances. However, VA does state that the applicant’s ability to accumulate liquid assets and the current availability of liquid assets for unplanned expenses should be considered in the overall credit analysis. See below for unique situations which do require documented reserves. Gift funds are not eligible to be used as reserves.
1.06.15.01 Using Rental Income of Other Property Not Securing the VA Loan – Reserve Requirements Documentation of cash reserves totaling at least 3 months PITI for each financed 2nd Home or investment property are required when the borrower owns properties other than the subject loan.
Section 1.06 Assets & Reserves Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 61 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.06 Assets & Reserves 1.06.15.02 Using Rental Income of 2-4 Unit Subject Properties – Reserve Requirements In certain situations when the subject property is a 2-4 unit property where the borrower is using rental income to qualify, 6 months PITI reserves are required.
Section 1.06 Assets & Reserves Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 62 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.07 Credit
1.07 Credit
1.07.01 Credit Report Requirements A credit report submitted with a loan application must contain all credit information available in the accessed repositories. Additionally, for each borrower responsible for the debt, the report must contain all of the information available in the credit repositories pertaining to
• credit • residence history, and • public records information
The accepted traditional credit report is the three-repository merged credit report, also known as a “tri-merged” credit report (TRMCR). Non-traditional credit is not allowed (may be possible with some government subsidized programs)
A corrected credit report must supplement the TRMCR if the report does not verify legal actions such as bankruptcies, judgments, lawsuits, foreclosures, and tax liens.
For any open debt listed on the loan application, but not referenced on the TRMCR, credit information must be developed separately.
Incorrect Social Security Numbers and dates of birth will require a new credit report to be pulled with the correct data. Major address inconsistencies and name extensions (Jr., III, etc.) must match throughout the file and may require a re-pulled credit report. Common shortening of names does not require a re-pulled credit report (e.g. Matt for Matthew).
1.07.02 Nontraditional Credit Non-traditional credit in lieu of a traditional credit report is not acceptable on any VA loan.
1.07.03 Age of Credit Documents • Credit reports cannot be older than 120 days from the Note Date. • Credit documents, such as income and asset documentation, cannot be older than 90 days from the Note Date.
1.07.04 Credit Score Requirements • All borrowers must have at least one valid credit score to use AUS/Traditional Credit Underwriting.
Section 1.07 Credit Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 63 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.07 Credit • When three scores exist, the middle of the three will be used as the qualifying credit score. • When only two scores exist, the lower of the two will be used as the qualifying credit score. • A borrower may have a “no score” credit report – the file may be considered for manual underwriting provided the borrower can provide non-traditional trade lines to be verified and borrower meets all manual underwriting requirements.
1.07.05 Inquiries All credit reports used for underwriting must include all inquiries for a minimum of the most recent 90 days.
Any inquiry that is found within the most recent 90 days must be addressed with a specific explanation letter from the borrower. The explanation letter must address the individual inquiry, the date, the reason for the inquiry, and the result. If a new debt was opened, the borrower must provide documentation to verify the payment and balance. The debt must then be added to the 1003, AUS and included in the DTI.
Inquires resulting from the subject mortgage application, for primary or secondary financing, do not require explanation. Should the customer have multiple applications for multiple properties an explanation will be required.
NOTE: FCM recommends the specific inquiry letter located on the FCM Knowledge Center be used to satisfy any credit inquiry explanations.
1.07.06 Maximum Debt Ratio AUS Approve/Accept Maximum DTI is per AUS AUS Refer/Manual Underwrite Maximum DTI: 41%
Anytime the DTI exceeds 41%, regardless of underwriting method or AUS findings, the borrower must meet 120% of the residual income requirement.
When the AUS returns a refer and/or the file is manually underwritten the DTI is limited to a 41% back end ratio. DTIs exceeding 41% on these types of loans are only allowed on an underwriting exception basis up to 50% with strong compensating factors and a residual income figure which exceeds 120% of the residual income requirement.
Section 1.07 Credit Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 64 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.07 Credit 1.07.07 Housing History All loans must contain a 24-month history of residence.
1.07.07.01 Purchases: • AUS Approval – determined by AUS • AUS Refer - loans are ineligible if there is one or more housing delinquency that is 1x30 or greater within 12 months of the date of the credit report • All mortgages must be current for the month due.
1.07.07.02 All Refinances (IRRRL & Cash Out / Regular Refinance): • Loans are ineligible if there is one or more housing delinquency that is 1x30 or greater within 12 months of the date of the credit report • All mortgages on the subject property must be current for the month due prior to the month in which they close. The subject property mortgage payment due in the month of closing may be paid either in cash or financed.
1.07.07.03 High Balance Transactions: • Loans are ineligible if there is one or more housing delinquency that is 1x30 or greater within 12 months of the date of the credit report • All mortgages on the subject property must be current for the month due prior to the month in which they close.
1.07.08 Open Charge / Revolving Accounts Open charge accounts, also known as Revolving Accounts, must have their payments included in the DTI calculation regardless of the number of payments remaining to pay off the debt.
If the credit report shows a revolving account with an outstanding balance but no specific minimum monthly payment, the payment must be calculated as the greater of:
• 5% of the outstanding balance, or • $10
Note: If the actual monthly payment is documented from the creditor or a copy of the current statement reflecting the monthly payment is obtained, that amount may be used for qualifying purposes.
Section 1.07 Credit Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 65 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.07 Credit 1.07.09 30-Day Charge Accounts 30-day accounts, or accounts where the balance is required to be paid off in full each month, do not require a monthly payment to be included in the debt-to-income ratio.
For open 30-day charge accounts that do not reflect a monthly payment on the credit report, or 30- day accounts that reflect a monthly payment that is identical to the account balance, borrower funds to cover the account balance must be verified. The verified funds must be in addition to any funds required for closing costs and reserves.
If there are not sufficient funds, a minimum of 5% of the balance should be included.
If the borrower paid off the account balance prior to closing, proof may be provided of payoff in lieu of verifying funds to cover the account balance.
1.07.10 HELOC Accounts If the actual payment cannot be determined on a Home Equity Line of Credit, a payment may be calculated using 1% of the outstanding balance.
1.07.11 Lease Payments Lease payments must be included in the borrower’s recurring monthly debt obligations, regardless of the number of months remaining on the lease.
1.07.12 Alimony, Child Support or Separate Maintenance When the borrower is required to pay alimony, child support, or maintenance payments under a divorce decree, separation agreement, or any other written legal agreement, and those payments will continue for more than ten months, the payments must be considered in the debt-to-income ratio. The alimony payments may be deducted from income. Child support and maintenance payments may not be deducted from income, must be treated as a liability.
One of the following is required to document the payment and the number of remaining payments:
• A copy of a written legal agreement or court decree describing the payment terms for the obligation, the amount of the award and the period of time over which it will be received • Any applicable state law that mandates the obligation document, which must specify the conditions under which payments must be made
Section 1.07 Credit Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 66 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.07 Credit Alimony, Child Support, or Separate Maintenance debts with less than 10 remaining payments may be excluded from the borrower’s debt ratio under certain circumstances. These payments may still be required by the underwriter if they deem the existing payment could have an adverse effect on the borrower’s repayment ability.
Generally underwriting will require the borrower have sufficient funds in reserves to pay off the debt in full. Note that it is not a requirement to pay off this debt, but the existence of reserves adds a level of assurance that the borrower’s repayment ability would not be hindered by the existing debt.
1.07.13 Child Care Expenses Childcare expenses must be included in borrower’s liabilities for qualification and residual income calculations. The monthly cost of child care should be disclosed on the VA Childcare Expenses disclosure and the amount should be supported by the borrower’s tax returns. If a discrepancy is noted, further documentation and/or explanation will be required.
1.07.14 Contingent Liabilities / Co-Signed Loans When a borrower co-signs for a loan to enable another party (the primary obligor) to obtain credit, but is not actually repaying the debt, the borrower has a contingent liability.
The contingent liability must be included in the debt-to-income ratio, unless there is documentation to evidence the loan payments are being made by someone else for a minimum of 12 consecutive months and the account is current with no history of delinquency.
Evidence such as cancelled checks or automated savings withdrawals will be accepted.
There must also not be a reason to believe the borrower will have to participate in the repayment of the loan.
If joint obligations are listed in the final divorce decree and/or separation agreement as being the responsibility of the ex-spouse, then they can be omitted from the qualifying DTI calculation. The divorce decree or separation agreement must be finalized by the court and recorded.
Borrower is still liable for any adverse payment history or outstanding debt associated with these joint accounts that are dated prior to the divorce or separation agreement.
Section 1.07 Credit Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 67 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.07 Credit 1.07.15 Business Debt When a self-employed borrower claims that a monthly obligation that appears on his or her personal credit report is being paid by the borrower’s business, the lender must confirm that it verified that the obligation was paid out of company funds and that this was considered in its cash flow analysis of the borrower’s business.
The account payment does not need to be considered as part of the borrower’s individual recurring monthly debt obligations if:
• the account in question does not have a history of delinquency, • the business provides acceptable evidence that the obligation was paid out of company funds (such as 12 months of canceled company checks), and • the lender’s cash flow analysis of the business took payment of the obligation into consideration.
The account payment does need to be considered as part of the borrower’s individual recurring monthly debt obligations in any of the following situations:
• If the business does not provide sufficient evidence that the obligation was paid out of company funds. • If the business provides acceptable evidence of its payment of the obligation, but the lender’s cash flow analysis of the business does not reflect any business expense related to the obligation (such as an interest expense—and taxes and insurance, if applicable—equal to or greater than the amount of interest that one would reasonably expect to see given the amount of financing shown on the credit report and the age of the loan). It is reasonable to assume that the obligation has not been accounted for in the cash flow analysis. • If the account in question has a history of delinquency. To ensure that the obligation is counted only once, the lender should adjust the net income of the business by the amount
1.07.16 Financed Properties FCM limits the maximum number of properties financed for VA borrowers with all lenders at four. The total maximum financed properties referenced above includes the subject property along with any other financed mortgages, conventional or government. This limitation includes joint or total ownership and is cumulative across all borrowers on the loan.
The following property types are included in the maximum number of financed properties:
Section 1.07 Credit Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 68 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.07 Credit • Residential properties including single-family, 2-4 units, condominium, lot, land, PUD (attached and detached), manufactured housing, row house, and townhouse. • Residential properties that have a commercial lien against them are included. • Residential properties that the borrowers purchased for elderly parents or a disabled child.
The following property types are excluded from the maximum number of financed properties:
• Commercial, franchises, multi-family (i.e. greater than four units), and timeshares.
1.07.17 Loans Secured by Liquid Assets Payments on a loan secured by liquid assets (i.e., 401k/IRA accounts, CDs, stocks, bonds, marketable securities, etc.) may be excluded from the DTI.
1.07.18 Installment Debt All installment debts not secured by a financial asset with 10 or more remaining payments must be included in the borrower’s debt ratios unless otherwise excluded for another satisfactory reason.
Installment debts with less than 10 remaining payments may be excluded from the borrower’s debt ratio under certain circumstances. These payments may still be required by the underwriter if they deem the existing payment could have an adverse effect on the borrower’s repayment ability.
Generally underwriting will require the borrower have sufficient funds in reserves to pay off the debt in full or residual income exceeding 120% that would compensate for the exclusion. Note that it is not a requirement to pay off this debt, but the existence of reserves adds a level of assurance that the borrower’s repayment ability would not be hindered by the existing debt.
Installment debt which does not list a payment on the credit report must have verification of the actual payment along with the term of the loan. Using percentages of outstanding balances to determine an estimated payment is not acceptable.
1.07.18.01 IRS Installment Agreements Borrowers with approved IRS installment agreements are eligible for financing. The installment agreement must be in writing and have a determined payment amount included in the borrower’s qualifying DTI. The following documentation is required:
• Letter from IRS stating terms and approval of Installment Agreement • Evidence 3 payments have been paid under the agreed terms (this is required when the taxes are delinquent)
Section 1.07 Credit Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 69 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.07 Credit 1.07.19 Deferred Installment Debt Debt payments such as a student loans or balloon notes scheduled to begin or come due within 12 months of the mortgage loan closing must be included as anticipated monthly obligations during the underwriting analysis.
1.07.20 Student Loans Student loans that are in repayment or scheduled to begin repayment within 12 months of closing are required to be included in the debt ratio. The payment must be calculated as follows:
Outstanding Loan Balance x 5% = XXXX /12 = Monthly Qualifying Payment
If there is a payment stated on the credit report the lender must use the greater of the calculation above or the reported payment. If the payment is less than the threshold calculation above the file must contain evidence from each loan servicer documenting the actual terms and payment information for each student loan.
If the borrower(s) provide written evidence that the student loan debt will be deferred at least 12 months beyond the date of closing, a monthly payment does not need to be considered.
1.07.21 “Paying Down” Accounts Paying down debt to qualify for the loan is not acceptable.
Paying off debt at or prior to closing, either installment or revolving, is acceptable if:
• Funds used to pay off the debt are documented, sourced, and received from either the borrower’s own funds or other acceptable party.
1.07.22 Disputed Accounts Underwriters may consider a veteran’s claim of bona fide or legal defenses regarding unpaid debts except when the debt has been reduced to a judgment. Account balances reduced to a judgment by a court must either be paid in full or subject to a repayment plan with a history of timely payments. For unpaid debts or debts that have not been paid timely, pay-off of those debts after the acceptability of applicant’s credit is questioned does not alter the unsatisfactory record of payment. Underwriters must still review the credit in its entirety and determine if the credit score is an accurate reflection of the borrower’s credit history. If it is not, then the loan must be manually downgraded or the disputes can be removed and credit repulled and rerun through the AUS.
Section 1.07 Credit Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 70 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.07 Credit 1.07.23 Past Due Accounts For loans receiving an AUS Accept/Approve, delinquencies on consumer credit accounts is evaluated by the AUS system. The underwriter must still take these delinquencies into consideration when evaluating the entire file.
Past due or delinquencies within the previous 12 months on consumer credit accounts are generally not permitted on manually underwritten files.
Note that Collection accounts and Past Due accounts are two separate classifications of debt. A collection account, by definition, is always past due and follows specific guidance found in the Collection/Charge-offs section below instead of the Past Due Account section.
1.07.24 Collections/Charge-offs Charge-off accounts are typically collections in which the creditor is no longer pursuing collection of the account. The circumstances regarding the negative credit history must be addressed when reviewing the overall credit of the borrower(s).
1.07.25 Outstanding Federally Insured or Guaranteed Debt A borrower is not eligible for a VA insured loan if they have any outstanding Federal debt until the delinquent account is brought current, paid, or satisfied.
Federal debts include direct loans, HUD-insured mortgage loans, VA-insured mortgages, student loans, Small Business Administration loans, or judgments/liens against property for a debt owed the Federal Government.
The only exception to the above guidelines are for Federal IRS Tax Liens against the property where the IRS has agreed to subordinate the lien.
Prior Federal defaults or claims must be documented with:
• A letter of explanation from the borrower regarding the circumstances surrounding the default or claim. • A letter on letterhead from the affected agency, signed by an officer and stating that the delinquent debt is now current, paid, or that a satisfactory agreement for repayment has been reached. • Underwriter or Processor’s reason for recommendation of the borrower
Section 1.07 Credit Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 71 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.07 Credit
1.07.26 Judgments/Liens All judgments, garnishments and/or liens must be paid in full at or prior to closing for purchase and cash out transactions. For refinance transactions, the debt must be paid prior to closing.
Documentation of payoff must be provided and a letter of explanation from the borrower is required.
Exceptions can be made on a case by case basis if the borrower has been making regular and timely payments on the judgment and the creditor is willing to subordinate that judgment to the insured first lien mortgage.
1.07.27 Chapter 7 Bankruptcy Chapter 7 Bankruptcy does not automatically disqualify a borrower from VA financing.
The borrower’s credit history since the bankruptcy, the circumstances behind the bankruptcy, and the discharge date all factor in to the final determination by the underwriter.
In all instances:
• The borrower must have re-established good credit since the bankruptcy or chosen not to incur new credit obligations, and • The borrower must document that their situation and the events that led to the bankruptcy are not likely to reoccur. • If the bankruptcy included a mortgage that was not re-affirmed in bankruptcy it will be treated as a foreclosure, date of deed transfer will be used to determine eligibility, please refer to section 1.07.29 Foreclosures to determine eligibility. Refinances of the subject property included in bankruptcy are not eligible if they were not reaffirmed in bankruptcy.
In ALL manual underwrite cases and some AUS-approved cases the following documentation is required:
• Copy of the bankruptcy petition • Schedule of Debts and Discharge • Written explanation from the borrower
Section 1.07 Credit Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 72 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.07 Credit The Discharge date and AUS findings both play an important role in determining the viability and future repayment of the new loan. As such, the following timeline requirements must be met regardless of AUS findings:
• Chapter 7 bankruptcy discharged more than 24 months prior to application date may be disregarded. • Chapter 7 bankruptcy discharged between 12 and 24 months prior to application date requires satisfactorily established credit and documentation showing the circumstances which caused the bankruptcy were beyond the borrower's control (i.e. unemployment, medical bills not covered by insurance). In these instances, the file must be manually downgraded to a refer and manually underwritten. It falls upon the underwriter to make a final determination as to the overall quality of the file. • Chapter 7 bankruptcy discharged less than 12 months prior to application date is not allowed.
Note that for High Balance Transactions a minimum of 7 years must have elapsed since the discharge date regardless of AUS findings.
1.07.28 Chapter 13 Bankruptcy Chapter 13 Bankruptcy does not automatically disqualify a borrower from VA financing.
The borrower’s credit history since the bankruptcy, the circumstances behind the bankruptcy, and the discharge date all factor in to the final determination by the underwriter.
A borrower who is currently in a Chapter 13 bankruptcy may be eligible for VA financing provided all of the following conditions are met in addition to standard manual underwriting requirements:
• At least 12 months of payments have been made satisfactorily • The Trustee or bankruptcy judge’s approval to enter into the mortgage transaction is documented • Bankruptcy payments are included in the borrower’s debt ratio
Regardless of the current status or discharge date of the Chapter 13, all of the below requirements must be met for all files which contain a history of a Chapter 13 bankruptcy:
• The borrower must have re-established good credit since the bankruptcy or chosen not to incur new credit obligations, and • The borrower must document that their situation and the events that led to the bankruptcy are not likely to reoccur.
Section 1.07 Credit Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 73 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.07 Credit Note that for High Balance Transactions a minimum of 7 years must have elapsed since the discharge date regardless of AUS findings.
1.07.29 Consumer Credit Counseling (CCC) If a borrower has prior adverse credit and is participating in a Consumer Credit Counseling plan, he/she may be determined to be a satisfactory credit risk if there have been at least 12 months’ satisfactory payments and the counseling agency approves the new credit.
If a borrower has good prior credit and is participating in a Consumer Credit Counseling plan, such participation is not considered as a factor in determining creditworthiness (participating prior to credit problems should not be considered negative).
1.07.30 Multiple Bankruptcy Filings All bankruptcies must meet the requirements listed in the Chapter 7 Bankruptcy and Chapter 13 Bankruptcy sections. Generally, manually underwritten loans with multiple bankruptcies are not acceptable.
1.07.31 Foreclosure A foreclosure does not automatically disqualify a borrower from VA financing.
In all instances, the “date of foreclosure” is considered the date of the foreclosure deed.
The borrower’s credit history since the foreclosure, the circumstances behind the foreclosure, and the foreclosure date all factor in to the final determination by the underwriter.
In all instances:
• The borrower must have re-established good credit since the foreclosure or chosen not to incur new credit obligations, and • The borrower must document that their situation and the events that led to the foreclosure are not likely to reoccur.
In ALL manual underwrite cases and some AUS-approved cases the following documentation is required:
• Written explanation from the borrower
The foreclosure date and AUS findings both play an important role in determining the viability and future repayment of the new loan. As such, the following timeline requirements must be met regardless of AUS findings:
Section 1.07 Credit Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 74 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.07 Credit • Foreclosure more than 24 months prior to application date may be disregarded. • Foreclosure less than 24 months prior to application date is not allowed.
1.07.32 Deed-In-Lieu of Foreclosure See previous Foreclosure section and follow same guidance.
1.07.33 Short Sales See previous Foreclosure section and follow same guidance. It should be noted that Short Sales which were current at the time of transfer are treated the same as Short Sales which were delinquent at the time of transfer.
1.07.34 Community Property States Purchase and refinance transactions for properties located in a Community Property State have additional underwriting and closing requirements when a non-purchasing spouse exists. The following states are Community Property states, please check Retail Standard Lending Footprint or Wholesale/NDC Standard Lending Footprint to verify loan availability in each state:
Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
1.07.34.01 Underwriting Requirements • Debts and obligations from a non-purchasing spouse must be counted in the qualifying ratios. • Credit from a non-purchasing spouse must be reviewed to determine outstanding debts to be factored into the qualifying ratios. • Non-purchasing spouse credit history and performance is not to be considered a reason for credit denial. The non-purchasing spouse’s credit score is not a factor. • The non-purchasing spouse’s collections and/or judgment totals must be included in the aggregate amount when determining program-specific payoff and/or payment amounts regarding these types of accounts. • CAIVRS is not required on the non-purchasing spouse.
1.07.34.02 Closing Requirements
ALL SPOUSES OF: ARE REQUIRED TO SIGN THE: • Borrowers • Security Instrument • Non-borrowing title holders, and • Truth In Lending Disclosure, and • Trustees • Notice of Right to Cancel
Section 1.07 Credit Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 75 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.07 Credit 1.07.35 Compensating Factors Manually underwritten loans must document compensating factors which influence the approval of the loan. A list of common compensating factors can be found below.
• Housing Expense Payments – The borrower has successfully demonstrated the ability to pay housing expenses greater than or equal to the proposed monthly housing expenses for the new mortgage over the past 12-24 months. • Down Payment – The borrower makes a large down payment of 10% or higher toward the purchase of the property. • Accumulated Savings – The borrower has demonstrated an ability to accumulate savings and a conservative attitude toward using credit. • Previous Credit History – A borrower’s previous credit history shows that they have the ability to devote a greater portion of income to housing expenses. • Compensation or Income Not Reflected in Effective Income – The borrower receives documented compensation or income that is not reflected in effective income, but directly affects their ability to pay the mortgage. This type of income includes food stamps and similar public benefits. • Minimal Housing Expense Increase – There is only a minimal increase in the borrower’s housing expense. • Substantial Cash Reserves – The borrower has substantial documented cash reserves (at least three months’ worth) after closing. • Substantial Non-Taxable Income – The borrower has substantial non-taxable income. (applies if no adjustment was previously made when computing debt ratios) • Potential for Increased Earnings – The borrower has a potential for increased earnings, as indicated by job training or education in their profession.
Section 1.07 Credit Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 76 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.08 Property
1.08 Property
1.08.01 Geographical Restrictions The VA product at First Community Mortgage is only restricted by the most recent standard lending footprint.
Wholesale/NDC Standard Lending Footprint
Retail Standard Lending Footprint
Note that additional products used in conjunction with VA products, such as THDA or Georgia Dream, may have their own proprietary lending territories.
1.08.01.01 State-Specific Restrictions STATE GUIDANCE Illinois • The following guidelines apply for primary residence and second homes: o Fully amortizing ARM loans will be acceptable ONLY if the following credit overlays are applied: . For all AUS processed fully amortizing ARMs, the greater of the product qualifying rate or the fully amortizing, fully indexed rate must be input into DU and LP as the note rate for qualifying purposes. . For traditionally underwritten fully amortizing ARMs, the borrower must be qualified at the greater of the product qualifying rate or the fully amortizing, fully indexed rate. Maryland • The following guidelines apply for primary residence and second homes: o Fully amortizing ARM loans will be acceptable ONLY if the following credit overlays are applied: . For all AUS processed fully amortizing ARMs, the greater of the product qualifying rate or the fully amortizing, fully indexed rate must be input into DU and LP as the note rate for qualifying purposes. . For traditionally underwritten fully amortizing ARMs, the borrower must be qualified at the greater of the product qualifying rate or the fully amortizing, fully indexed rate. Minnesota • The following guidelines apply for primary residence and second homes: o Fully amortizing 7/1 and 10/1 ARM loans will be acceptable ONLY if the following credit overlays are applied:
Section 1.08 Property Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 77 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.08 Property
. For all AUS processed fully amortizing 7/1 and 10/1 ARMs, the fully amortizing, fully indexed rate must be input into DU and LP as the note rate for qualifying purposes. . For traditionally underwritten fully amortizing 7/1 and 10/1 ARMs, the borrower must be qualified at the fully amortizing, fully indexed rate. Texas • Texas 50 (a)(6) Transactions are ineligible. • A survey is required for all transactions in the state of Texas. Wisconsin • Please see the subsequent section on Community Property States for additional restrictions in the state of Wisconsin.
1.08.02 Title Commitment • Amount of policy may not be less than the original principal balance of the mortgage. • Named Insured must be: First Community Mortgage, Inc., ISAOA/ATIMA • ICL/CPL must be loan specific and include the subject property address or borrower name. • Final Title Policy Requirements: • ALTA standard (1990 ALTA policies are not permitted) or ALTA Expanded Coverage Residential Policy is acceptable in all states. The modified ALTA Short Form Residential loan policy approved by the State of Florida is acceptable on Florida properties only. • ALTA Endorsement 4 (condominium) – required on all condominium properties. • ALTA Endorsement 5 (PUD’s) – required on all PUD properties. • ALTA Endorsement 6 (ARM’s) – required on all ARM transactions. • ALTA Endorsement 8.1 (environmental hazards) – required on all properties. • ALTA Endorsement 9 (restrictions, encroachments, minerals) – required on all properties. • Title policy must include, as an informational note, (a) the recorded plat number(s), if any, and (b) the property parcel number(s), or tax identifying number(s), as applicable, if available. • Any Survey Exception must be deleted. • The legal description on the policy must conform to the legal description contained in the Security Instrument. • Tax information including next due and amount to be included on the title commitment. • Florida properties require Florida Endorsement Form 9 (aka ALTA 9-06) as well as a property survey. If an existing survey is being utilized a Survey Affidavit must be completed.
Section 1.08 Property Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 78 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.08 Property 1.08.03 Hazard, Flood and Condo Insurance Please see FCM’s Insurance Policies and Requirements document for all insurance related information.
1.08.04 Occupancy Types
1.08.04.01 Overview VA loans are limited to owner-occupied principal residences only.
1.08.04.02 Primary Residence A primary residence is defined as a property that will be occupied by the borrower for the majority of the calendar year.
VA security instruments require the borrower to establish bona fide occupancy in a home as the borrower’s principal residence within 60 days of signing the security instrument, with continued occupancy for at least one year.
VA will accept 1-4 unit properties as long as the borrower occupies the property (or at least 1 unit) as his/her primary residence.
Personal occupancy is required for single veterans, regardless of whether the veteran is on active duty.
The occupancy requirement is satisfied if the spouse of a veteran who is on active duty occupies the property.
Note: Occupancy by the spouse may satisfy the requirement if the veteran cannot personally occupy the dwelling within a reasonable time due to distant employment other than military. These loans require VA Prior Approval from the Regional Loan Center (RLC).
No family member or person other than the veteran’s spouse can satisfy the occupancy requirement for the veteran.
(1) Special Occupancy Consideration Occupancy within a period exceeding 60 days after the date of closing may be considered if both of the following conditions are met:
• the veteran certifies that he/she will personally occupy the property as his/her residence at a certain specific date after loan closing, AND
Section 1.08 Property Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 79 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.08 Property • there is a future event that will make it possible for the veteran to personally occupy that property on the specific future date (i.e., the future event could be permanent reassignment to a duty station in the vicinity of the property six (6) months following loan closing).
Note: Occupancy for active duty service members, either single or married, while deployed from their permanent duty stations are considered to be in a temporary duty status. The veteran is able to provide a valid intent to occupy certification whether or not a spouse will be available to occupy the property prior to the veterans return from deployment.
Completion of VA Form 26-1820 for Special Occupancy Considerations
• If there is a special occupancy situation on a loan, it must be noted in item #27(b) on the Report and Certification of Loan Disbursement (VA Form 26- 1820). • If an active duty veteran cannot occupy the property, his/her spouse must certify owner-occupancy. Evidence must be provided that the veteran is unable to occupy the property because of such status in the armed forces. This is Certification #2 on VA Form 26-1820.
1.08.04.03 Secondary Residence A secondary residence is defined as a property that a borrower occupies in addition to his/her principal residence.
Second homes are not eligible for VA loans at First Community Mortgage.
1.08.04.04 Investment Property An investment property is defined as a property that is not occupied by the borrower as a principal or secondary residence.
Investment properties are not eligible for VA loans at First Community Mortgage.
1.08.05 Property Evaluation
1.08.05.01 Eligible Properties First Community Mortgage accepts the following property types for VA loans:
• One-to-four unit • Townhomes/PUDs
Section 1.08 Property Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 80 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.08 Property • Condominiums that are on the VA approved list.
1.08.05.02 Ineligible Properties First Community Mortgage does not accept the following property types for VA loans:
• Co-ops • Mixed-Use Properties • Commercial Enterprises • Boarding Houses • Tourist Houses • Private Clubs • Bed and Breakfast Establishments • Fraternity or Sorority Houses • Sinkhole Homes • Berm Homes • Non-Warrantable Condos • Life Estate • Working Farms • Leasehold Estates • Hotel or Motel Condominium Conversions (or conversions of other similar transient properties) • Properties located in Costal Barrier Resource System areas
1.08.05.03 Appraisal Requirements • An appraisal can be ordered online in WebLGY only after a COE has been requested.
• A full appraisal must be completed for all VA loans (except where noted for IRRRLs) by a VA approved appraiser and ordered through the VA website. • The following appraisal forms are required based on property type:
o 1 unit single family dwellings: Uniform Residential Appraisal Report (Fannie Mae Form 1004)
o 2-4 unit dwellings: Small Residential Income Property Appraisal Report (Fannie Mae Form 1025)
o Condominium units: Individual Condominium Unit Appraisal Report (Fannie Mae Form 1073)
Section 1.08 Property Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 81 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.08 Property • Appraisals are valid for 6 months from the date of inspection to the Note date. • All appraisals must have a VA case number assigned to the subject property before the appraisal is ordered. • An appraisal cannot be provided to the borrower until the Notice of Value (NOV) has been issued. • Finalizing an NOV is not an acceptance of the property’s value, but merely a recognition of receipt of the appraiser’s determination. • The effective date of appraisal cannot be before the VA case number assignment. • All property conditions, including repairs, alterations and/or required inspections must be reported within the appropriate section of the applicable Fannie Mae appraisal reporting form. • See the New Construction section for information regarding property inspections on these types of loans. • If the sales contract is amended during the appraisal process (prior to the effective date of the appraisal), the lender must provide the updated contract to the appraiser to ensure the appraiser considers the potential impact on value of any changes • If the sales contract is amended after the effective date of the appraisal, but prior to loan closing, the lender must use due diligence to determine whether the amendment(s) could reasonably be thought to affect the estimated value of the property. If so, the lender must forward the amended sales contract to the VA fee appraiser for consideration. The appraiser will be responsible for determining the impact of the amended sales contract and compliance with all provisions of USPAP in developing and reporting credible assignment results. Depending on the extent of any change to the originally considered sales contract, the appraiser may consider the change to constitute a new assignment under USPAP, warranting an additional fee, chargeable to the Veteran, up to the full amount of a new appraisal.
1.08.05.04 Access to Property There must be vehicular access to the property via an all-weather public or private street. If a private street is the only form of access there must be a permanent recorded easement and provisions for permanent maintenance of the street.
If a maintenance agreement does not exist, every effort should be made to obtain the agreement of all owners of properties on the private road to share the cost of maintaining the road.
Section 1.08 Property Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 82 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.08 Property In the absence of an agreement signed by all owners, particularly those of properties located between the subject property and the public road, an agreement by a Veteran to accept responsibility for a disproportionate share of the road must be reasonable in regard to the distance from the subject property to the public road. The RLC of jurisdiction must be contacted in order to approve the agreement. VA will not accept an agreement in which the Veteran accepts sole responsibility for maintaining an unreasonable distance of the private road as this could create a burden for the Veteran as well as future property owners
If private street maintenance is covered in the organizational documents for a planned unit development (PUD) or condominium, or by state law, the NOV may be issued without a requirement for further documentation.
1.08.05.05 Pest Inspections If the property is located in an area on the Termite Infestation Probability Map where the probability of termite infestation is "very heavy" or "moderate to heavy" on origination appraisals, a wood destroying insect inspection report must be required on the NOV.
Section 1.08 Property Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 83 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.08 Property
If a termite letter shows there are any current infestations, then treatment is required.
If a termite letter or appraisal notates any damage due to termites, FCM will require proof the damage was repaired, or a licensed inspector, contractor, or structural engineer will need to verify the damage is minor. Also, the letter must clearly state the evidence observed has not affected the structural soundness of the home.
Termite inspection letters must be dated within 90 days of closing. Soil treatment letters must be dated within 12 months of the day of closing.
Veteran borrowers cannot pay for the termite inspection and soil treatment fees.
A termite inspection is not required on units in high-rise condominiums (units are stacked vertically). For villa and townhome style condominiums where units are side by side, not stacked, if located in a “very heavy” or “moderate to heavy” zone, a termite inspection must be required on the NOV unless the homeowner’s association provides evidence of treatment.
Section 1.08 Property Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 84 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.08 Property
1.08.05.06 Wells & Septic Systems
(1) Community Wells & Septic Systems Community well and/or septic systems must be owned, operated, and maintained by a private corporation or a non-profit property owner’s association. Connection to public water and/or sewer systems will only be mandatory if required by the local building, planning, or health authorities.
(2) Shared Wells The following requirements must be met for a shared well:
• The well must be capable of providing a continuing supply of safe and potable water to each property simultaneously, so that each dwelling will be assured a sufficient quantity for all domestic purposes. • There must be a permanent easement which allows access for maintenance and repair. • There must be a well-sharing agreement which
o makes reasonable and fair provisions for maintenance and repair of the system and the sharing of those costs
o is binding on the signatory parties and their successors in title, and is recorded in local deed records.
Connection to public water and/or sewer systems will only be mandatory if required by the local building, planning, or health authorities.
(3) Private Septic Systems Waste water systems must be determined to be free of observable evidence of system failure. Certification can be provided by the local health department, a septic system professional, a qualified home inspector, or can be evidenced on the appraisal if completed by a FHA roster appraiser. A septic system test is only required when:
• Evidence of system failure is present, • If mandated by local or state jurisdiction, • If customary to area, or; • If required by lender.
Section 1.08 Property Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 85 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.08 Property All new systems must be accompanied by a permit and local health department approval.
Connection to public water and/or sewer systems will only be mandatory if required by the local building, planning, or health authorities.
(4) Private Wells For private wells, a test of the well water is always required. The local health authority or a state certified laboratory must perform a water quality analysis. The water quality must meet state/local standard. The Safe Water Drinking Act does not apply to private wells. Contact the Environmental Protection Agency (EPA) at (800) 426-4791 for referrals to certified labs and other inquiries.
Connection to public water and/or sewer systems will only be mandatory if required by the local building, planning, or health authorities
(5) Conditions Requiring a Veterans Signed Statement The appraiser must comment in the appraisal and the Veteran must acknowledge awareness in writing when the water to the property is:
• supplied by dug wells, cisterns, or holding tanks used in conjunction with water purchased and hauled to the site, • provided with a mechanical chlorinator, • provided through springs, lakes, rivers, sand-point or artesian wells, or • supplied with a rainwater catchment system
(6) Water Filtration System If the property has a water filtration system, the Veteran must acknowledge in writing that the water must be continuously treated as required by the local health authority to be considered safe for human consumption and for this to be effective, the system must be inspected and maintained to include filter replacements per the manufacturers’ recommendations.
1.08.05.07 Easements If any part of the residential structure lies within utility or drainage easement boundaries, the property is ineligible for financing. The residential structure includes attached improvements such as decks or patios.
Section 1.08 Property Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 86 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.08 Property 1.08.05.08 FEMA Disaster Areas FEMA announces major disaster areas for specific counties after a significant event has occurred which the President of the United States has declared a disaster area. Please see the FEMA Declared Disasters document on the FCM Knowledge Center. The following procedures will be followed for any properties located in a county declared a disaster by the President of the United States.
To pass along the cost of the re-inspection to the borrower a Change In Circumstance form must be completed and submitted to FCM for approval within 3 days of the announcement by FEMA.
(1) If the original appraisal was performed ON or Before the Incident Period End Date: • Property must be re-inspected by the original appraiser or, if not available, another licensed appraiser. The appraiser must provide the following commentary/evidence:
o Property is free from damage and the disaster had no effect on value or marketability.
o Photos provided of exterior only.
• If the re-inspection indicates damage, the extent of the damage must be addressed along with the following:
o Completion of repairs is required as evidenced by Form 1004D/442, Appraisal Update and/or Completion Report prior to closing.
o Photos are provided of interior, exterior and neighborhood.
(2) If the appraisal is performed after the Incident Period End Date: • Appraisal must include written certification by the appraiser that:
o Property is free from damage and the disaster has no effect on value or marketability.
o All Comparables should be post-disaster; however, if sufficient comparables are not available, the appraiser must provide current photos of the subject property and comparables. MLS photos or photos used for previous appraisals are not acceptable.
Section 1.08 Property Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 87 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.08 Property • If appraisal indicates damage, the extent of the damage must be addressed, along with the following:
o Completion of repairs is required as evidenced by Form 1004D/442, Appraisal Update and/or Completion Report, with photos, prior to closing.
o Photos are provided of interior, exterior and neighborhood.
Additional Considerations:
All loans with a property inspection waiver including IRRRLs, that are located in a FEMA Declared Disaster Area will require a disaster inspection with exterior photos for a period of 90 days after the Incident Period End Date declared by FEMA.
1.08.05.09 Condominiums A condominium is a multi-unit project that has individually-owned units, which may be either attached in one or more structures or detached from and each other and is essentially residential in use. Site condos must also be listed on the VA Approved list.
All condominiums must be on VA approved list. It should be verified that the property is an approved condominium prior to ordering the appraisal. If a condominium doesn’t appear on the VA condo approval list the lender may submit a written request for VA Approval and a copy of the condominiums organizational documents – reference table below:
Required Document New Project Existing Resales Draft 1 Declaration of Covenants, Conditions and Yes Yes Yes Restrictions 2 Bylaws for HOA Yes Yes Yes 3 Articles of Incorporation for HOA If Applicable If Applicable Yes
4 “Umbrella” projects, Declaration, Bylaws If Applicable If Applicable Yes and Articles of Incorporation, as above 5 Plat, map and/or air lot survey of project Yes Yes Yes 6 Plat, map and/or air lot survey of unit(s) If Applicable If Applicable Yes 7 Development plan and schedule Yes If Declarant Controls Yes 8 Information or Public Offering Statement Yes If Declarant Controls Yes 9 Grant/deed/leasehold agreement form Yes If Declarant Controls Yes 10 State reviewing agency’s report If Applicable If Applicable Yes 11 Annexation documents If Applicable If Applicable Yes 12 Cross-easement(s) If Applicable If Applicable Yes 13 Facility Leases If Applicable If Applicable Yes 14 Management agreement If Applicable If Applicable Yes
Section 1.08 Property Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 88 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.08 Property
15 Service contract(s) (either form of or actual) If Applicable If Applicable Yes 16 HOA budget (existing or proposed) Yes Yes No 17 Current financial statements and reserves of If Applicable If Applicable No project 18 Special assessments/litigation statement Yes Yes No 19 Minutes of last two HOA meetings Yes Yes No 20 Registered architect/engineer statement on If Declarant If Declarant Controls No project condition (conversions only) Controls
Please see the previous section on insurance requirements for specific insurance guidelines on condominiums.
1.08.05.10 Planned Unit Developments (PUDs) A PUD is a mixed-use residential development of single-family dwellings in conjunction with rental, condominium, cooperative or town house properties. A residential development should be processed as a PUD if it has the following minimum characteristics:
• a homeowner association that holds either title in fee or a lease of prescribed length on the common area, • mandatory membership of all unit owners (or units) in the association, • the right of all unit owners to participate by vote in the operation of the association, • lien supported assessment of the members to meet the association’s budgeted operating costs (special assessments may be handled differently), and • the appraisal for a detached PUD must be ordered as a detached PUD, not as a single- family residence.
Homeowner’s assessments must be subordinate to the mortgage. Provide one of the following items as documentation of HOA assessment subordination (required for all loans except Streamline refinances):
• PUD by-laws indicating all homeowner’s association assessments are subordinate to mortgage liens (At minimum, First Community Mortgage must review the title page, table of contents and corresponding HOA lien subordination section reflecting the page(s) indicated in the table of contents) or • Subordination agreement executed by a representative of the homeowner’s association or • Title commitment stating that the title company will insure over any homeowner’s association assessment liens or
Section 1.08 Property Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 89 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.08 Property • Letter on letterhead from the title company indicating that PUD liens cannot take first lien position in the state in which the property is located or • ALTA 9 or ALTA 5 title endorsement • 60-Day letters may not be provided in lieu of one of the documents above
Please see the previous section on insurance requirements for specific insurance guidelines on attached PUDs.
1.08.06 New Construction
1.08.06.01 Overview - New Construction VA defines property in the following three (3) categories:
• proposed/under construction, • new construction, and • existing construction
Properties built one year or more prior to the date of the appraisal, regardless of whether or not they were previously owner occupied, are considered as “existing” for VA documentation purposes.
FCM only allows properties which are classified as New Construction on the appraisal report for New Construction loans. Properties classified by the VA appraiser as “Proposed/Under Construction” are not allowable.
1.08.06.01 Transaction types in a Construction/Permanent Home Loan
• Transactions in which a Veteran has signed a contract to build will be considered a purchase, regardless of the category shown on the closing disclosure. The case must be ordered as new construction and purchase” in WebLGY, through Veterans Information Portal (VIP).
• Transactions in which a Veteran acted as their own contractor, and/or hired subcontractors may be considered a purchase. All labor and material costs must be documented by receipts, work orders, and/or contractual agreements to establish the acquisition price. The case must be ordered as a new construction and purchase in WebLGY ******* FCM does not allow the Veteran to act as their
Section 1.08 Property Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 90 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.08 Property own contractor, and/or hire subcontractors to build their home.****
• Transactions in which construction was completed and at least 1 year has passed as evidenced by a Certificate of Occupancy (CO), or other evidence by the taxing authority will be treated as refinance. A new VA appraisal after the date of the CO is required, and should be ordered as a VA cash-out refinance in WebLGY. Construction exhibits such as plans, specifications, and contracts are not required.
(1) Loan Characteristics Acquisition Costs. May be included in the VA loan if evidence is provided of items listed below:
o The contract to build, o Cost of the lot if acquired within one year from VA loan closing, or o Value of the lot if acquired more than one year from VA closing, or o Value of the lot if gifted to the Veteran and there are no liens on the lot, or o Lots gifted less than one year from VA closing are limited to lot lien(s) if any, o Interest reserve if not included in the contract to build, o Contingency reserve, and o Permits if not included in the contract to build.
Cash Back to Borrower. In instances where down payment funds came directly from the borrower, or the borrower purchased a lot in cash, or has unencumbered ownership of the lot being used as a down payment, the borrower may receive cash back at closing for the amount paid provided that the final loan amount does not exceed the NOV value, and evidence of the funds provided by the borrower are documented in the loan file. The borrower cannot receive cash from equity in the project, or funds provided by another party.
Maximum Loan Amount. The maximum loan amount for construction loans is limited to:
o the lesser of the VA reasonable value, or the acquisition costs, plus o the cost of any energy efficiency improvements up to $6,000, plus o VA funding fee.
Section 1.08 Property Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 91 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.08 Property 1.08.06.02 Re-sales of New Construction Properties If the property was owner occupied there are no additional requirements. If the property is less than 12 months old and was not owner occupied or never occupied the property must meet one of the following: • Covered by a one-year VA Builder’s Warranty or • Enrolled in a HUD-accepted ten year insured protection plan or • Built by a veteran, as the general contractor, for his or her own occupancy
1.08.06.03 Documentation Requirements for New Construction Builder must have a valid builder identification number prior to ordering the appraisal.
A Soil treatment letter dated within 12 months of the closing date is required on all new construction.
Properties appraised as new construction must be covered by either:
• a one-year VA Builder's warranty or • a ten-year insurance backed protection plan
Evidence that the new construction property was satisfactorily completed will be documented as follows:
• If the local authority performs foundation, framing and final inspections, VA will accept the certificate of occupancy as evidence of local authority inspections and satisfactory completion of construction in compliance with local building code requirements. If the local authority does not issue a certificate of occupancy, copies of the three satisfactory inspection reports or a written statement from the local authority confirming the three inspections were completed and that the construction was found to be satisfactory will be acceptable.
• If the local authority does not provide construction inspections, the lender must certify that the property is complete (both on-site and off-site improvements), and that it meets VA MPRs for existing construction
1.08.06.04 Appraisal Requirements for New Construction • New construction properties must have at least one comparable from outside the subdivision. All builder sales must not be used in the same subdivision.
Section 1.08 Property Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 92 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.08 Property • New construction properties that are approximately 90%-95% complete, with only minor finish work remaining, may be appraised without the appraiser having plans and specifications.
Notes:
o "Complete" means everything is complete including the installation of buyer preferences (flooring, appliances, etc.), utilities are on and fully functioning and all site improvements completed at the time of appraisal (Ready for Occupancy).
o If the appraiser makes no repair or correction conditions, the appraisal serves as the final inspection.
1.08.06.05 Calculating Tax Estimates for New Construction The borrower must qualify with the monthly payment based on improved property taxes, not on the vacant land.
Realistic estimates for the improved property taxes used for loan qualification purposes as well as setup of monthly escrow accounts must come from a reliable source such as:
• The Appraiser • Comparable Sales Data • The Title Company as determined by the Assessor’s Office
1.08.07 Declining Markets If the appraisal indicates that the property is located within a declining market a detailed explanation by the appraiser on the effect of the declining market on the subject neighborhood values and how the appraiser determined the property to be in a declining market are required. Additional comparables may be required by the underwriter on a case- by-case basis.
1.08.08 Right of Redemption Transactions
1.08.08.01 Overview Certain state laws provide a “redemption period” after a foreclosure or tax sale has occurred, during which time the property may be reclaimed by the prior mortgagor or other party upon payment of all amounts owed. The length of the redemption period varies by state and does not expire automatically upon sale of the property to a new owner.
Section 1.08 Property Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 93 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.08 Property 1.08.08.02 Underwriting Stipulations • No Manufactured Homes • Surety Bonds Required – consult with your title company for further details
Section 1.08 Property Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 94 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.09 Refinance Transactions
1.09 Refinance Transactions Below are general guidelines specific to VA refinance transactions. Please note that all of the previous guidance in the above sections apply to refinance transactions as well unless specifically stated. First Community Mortgage offers the following three types of VA refinance programs:
• Type I Cash-Out Refinance • Type II Cash-Out Refinance • Interest Rate Reduction Refinance Loan (IRRRL)
1.09.01 General Overview • There must be an existing lien against the property. • The payment due in the month the loan is closing must be paid either prior to closing or included in the payoff amount at closing. • All subordinate financing must be seasoned for at least six months prior to application. • The mortgage must be current for the month prior to the month in which they close and the month they close. Note: The borrower has the option to make the current payment at the beginning of the month or include it in the payoff amount at closing, when closing within the month the payment is due.
1.09.02 Cash Out / Regular Refinances
1.09.02.01 Types of Cash Out Loans
(1) Type I Cash Out Refinance A refinancing loan in which the loan amount (including VA funding fee) does not exceed the payoff amount of the loan being refinanced.
(2) Type II Cash Out Refinance A refinancing loan in which the loan amount (including VA funding fee) exceeds the payoff amount of the loan being refinanced.
Section 1.09 Refinance Transactions Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 95 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.09 Refinance Transactions 1.09.02.02 All Cash Out Refinances must meet the following requirements:
(1) Loan-to-value (LTV) FCM is aligning with GNMA APM 19-05 and is reducing the total LTV to 90% for all full doc VA refinance transactions.
(a) LTV Calculation Divide the total loan amount (including the VA funding fee, if applicable) by the reasonable value on the Notice of Value of the property determined by the appraiser.
(2) Net Tangible Benefit Test (NTB) Ensure that all cash-out refinancing loans pass a NTB, which includes providing the Veteran with the following information no later than the third business day after receiving the Veteran’s loan application, and again at loan closing:
(a) The refinancing loan satisfies at least one of the following eight NTB:
i. The new loan eliminates monthly mortgage insurance, whether public or private, or monthly guaranty insurance;
ii. The term of the new loan is shorter than the term of the loan being refinanced;
iii. The interest rate on the new loan is lower than the interest rate on the loan being refinanced;
iv. The payment on the new loan is lower than the payment on the loan being refinanced;
v. The new loan results in an increase in the borrower’s monthly residual income;
vi. The loan refinances an interim loan to construct, alter, or repair the home;
vii. The new loan amount is equal to or less than 90 percent of the reasonable value of the home, or;
viii. The new loan refinances an adjustable rate loan to a fixed rate loan.
Section 1.09 Refinance Transactions Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 96 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.09 Refinance Transactions (b) A comparison of key loan characteristics or terms for the existing and refinancing loan. The Veteran must sign and/or acknowledge receipt of both disclosures (within 3 days of application and at closing). The comparison must include:
i. Refinancing loan amount vs. the payoff amount of the loan being refinanced
ii. Loan type (i.e., fixed, adjustable) of the refinancing loan vs. the loan being refinanced.
iii. Interest rate of the refinancing loan vs. the loan being refinanced.
iv. Loan term of the refinancing loan vs. the loan being refinanced.
v. The total the Veteran will have paid after making all payments (principal and interest), and mortgage insurance, as scheduled, for both the refinancing loan and the loan being refinanced.
vi. LTV of the refinancing loan vs. the loan being refinanced.
(c) An estimate of the home equity being removed from the home as a result of the refinance and explain how the removal of the home equity may affect the Veteran.
(3) Loan Seasoning The following loan seasoning requirements apply to ALL Type I and Type II refinancing loans. Permanent Financing Construction Loans are exempt. A loan is considered seasoned on the later of the date that is:
(a) 210 days after the first monthly payment is due to the note date of the new loan, and
(b) Six consecutive monthly payments have been made on the loan prior to the note date of the new loan.
Section 1.09 Refinance Transactions Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 97 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.09 Refinance Transactions (c) For loans being refinanced within 1 year from the date of closing, lenders must obtain a payment history/ledger from the servicing lender documenting all payments, unless a credit bureau supplement clearly identifies all payments made in that timeframe. If the loan is selected for audit by VA, the lender must include the payment ledger/history of the loan being refinanced in the loan file for VA review.
Refinancing Scenario Seasoning requirement applicability
VA to VA, including IRRRL Ginnie Mae Seasoning requirements are applicable
Non-VA to VA refinance Ginnie Mae Seasoning requirements are applicable
Loan Refinancing Non-Mortgage Debts (VA Ginnie Mae Seasoning requirements are not requires the payoff of a secured lien for the applicable transaction to be eligible)
Loan Refinancing a Mortgage Without Scheduled Ginnie Mae Seasoning requirements are not Monthly Payments (ex. Reverse Mortgage) applicable
(4) Fee Recoupment Recoupment period of all fees, closing costs, expenses (other than taxes, escrow, insurance and like assessments), incurred costs must not exceed 36 months from the date of the loan closing. This requirement only applies to Type I cash-out refinancing loans made to refinance an existing VA- guaranteed home loan.
(a) Recoupment Calculation Divide all fees, closing costs, expenses, and incurred costs (excluding funding fee, taxes, escrow, insurance, and like assessments), by the reduction of the monthly principal and interest payment as a result of the refinance. If the loan being refinanced has been modified, the principal and interest reduction must be computed/compared to the modified principal and interest monthly payment.
Section 1.09 Refinance Transactions Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 98 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.09 Refinance Transactions 1.09.02.03 Overview • VA considers the transaction a Cash Out / Regular refinance when any type of lien or liens against the secured property are being paid off, whether the borrower receives any cash at closing or not. • See Maximum Loan Amount section for information about determining maximum financing. • A Cash Out / Regular refinance allows the loan proceeds to be used for any reasonable purpose, including debt consolidation and home improvement.
1.09.02.04 Credit • No 30 day or greater mortgage lates in the most recent 12 months or existing mortgage history if less than 12 months. • See Credit Score/LTV Matrix for credit score and LTV restrictions. • A copy of the note or other documentation with required information (1st payment date, rate, P&I, etc) from the original loan is required.
1.09.02.05 Subordinate Financing • Existing subordinate financing is allowed on Cash Out / Regular Refinances up to stated CLTV restrictions found on the Credit Score/LTV Matrix. • New subordinate financing is not allowed.
1.09.02.06 Properties Listed for Sale • Cash Out / Regular Refinances are not allowed if the property was listed for sale by the current borrower within the past 180 days of application.
1.09.03 Interest Rate Reduction Refinance Loan (IRRRL)
1.09.03.01 Overview An eligible borrower can use a VA-guaranteed Interest Rate Reduction Refinancing Loan to refinance an existing VA loan to lower the interest and payment. Typically, no credit underwriting is required for this type of loan. The loan may include the entire outstanding balance of the prior loan as well as closing costs, including up to two discount points.
The LTV/CLTV is determined using the total loan amount including the financed funding fee.
Cash back to the borrower at closing is not allowed (incidental cash back is not to exceed $500.00).
Section 1.09 Refinance Transactions Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 99 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.09 Refinance Transactions *** A COE is required except in the following three situations:
1) The Veteran has already been determined to be exempt from the funding fee as evidenced on IRRRL assignment screen in WebLGY.
2) The entitlement encumbered on the loan being refinanced belongs to the surviving spouse of a Veteran.
3) The entitlement encumbered on the loan being refinanced belongs to a Veteran who has since passed away and the IRRRL borrower is spouse who was also a co-borrower on the loan being refinanced.
1.09.03.02 Borrowers The borrower(s) on the previous loan must be the same except for:
• The removal of a non-veteran spouse due to death or divorce OR • The addition of a new spouse
1.09.03.03 Credit • A mortgage-only credit report with three scores is generally sufficient for an IRRRL. • Borrower can have no 30 day or greater mortgage lates in the most recent 12 months. • See Credit Score/LTV Matrix for credit score and LTV restrictions. • A copy of the note or other documentation with required information (1st payment date, rate, P&I, etc) from the original loan is required.
1.09.03.04 Employment & Income • Income documentation is not required, except when the PITIA will increase by 20% or more, in which case the borrower must credit qualify. • A verbal verification of employment is required. • Tax Transcripts are not required.
1.09.03.05 Assets required to Close • Verification of Assets to Close is not required.
1.09.03.06 Subordinate Financing • Existing subordinate financing is allowed on IRRRLs up to stated CLTV restrictions found on the Credit Score/LTV Matrix. • New subordinate financing is not allowed.
Section 1.09 Refinance Transactions Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 100 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.09 Refinance Transactions 1.09.03.07 Properties Listed for Sale • IRRRLs are not allowed if the property was listed for sale by the current borrower within the past 90 days of application. • If the property was listed for sale within the six months preceding the application date, the maximum LTV/CLTV is limited to 70%.
1.09.03.08 Appraisal Requirements • An appraisal or valuation is not required if the loan does not include discount points and is not going from a Fixed to ARM term. • A loan-to-value determination must be provided when the terms is going from fixed to adjustable and when the lower interest rate is produced solely from discount points. A conventional appraisal (non-Web LGY) 2055 or 1004/1073 will be required. So an appraisal is only required if it meets both of these.
1.09.03.09 ATR/Safe Harbor and Net Tangible Benefit Requirements • VA IRRRL Net Tangible Benefit form is required with underwriting submission • The existing loan being paid off must be seasoned a minimum 210 days from the first payment due of the existing mortgage to the note date of the new mortgage; and the borrower must have made at least 6 payments on the existing loan. • The term of the new loan may not exceed the original term by more than 10 years. • The interest rate of the new loan must be less than the interest rate of the existing VA loan unless refinancing an ARM to a fixed rate • The P&I payment must be less than the P&I payment on the existing VA loan unless refinancing from an ARM to a fixed OR the term of the new loan is less than the existing, but they must still meet the recoupment requirements. • If the PITIA increases by 20% or more the borrowers must credit-qualify. • The existing loan is not currently past due and has not been 30 days or more past due during the prior 12-month period. • All other VA requirements for guaranteeing an IRRRL are met, including the requirements related to exemption of income verification are satisfied. • The proposed IRRRL does not increase the principal balance outstanding on the existing residential mortgage loan, except to the extent of fees and charges allowed by VA. • Total points and fees payable in connection with the proposed IRRRL do not exceed 3 percent of the total proposed principal amount. • The proposed IRRRL is subject to a payment schedule that will fully amortize the IRRRL in accordance with VA regulations.
Section 1.09 Refinance Transactions Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 101 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.09 Refinance Transactions • The terms of the proposed IRRRL do not result in a balloon payment, as defined in the TILA. • Both the residential mortgage loan being refinanced and the proposed IRRRL satisfy all other VA requirements • The interest rate must bear a lower interest rate than the loan it is refinancing:
o Fixed to Fixed requires 0.5% reduction o Fixed to ARM requires 2.0% reduction o ARM to Fixed and ARM to ARM are exempt from rate reduction o To ensure compliance, a copy of the note from the refinanced loan must be provided
• When refinancing from Fixed Rate to ARM discount points may be added to the principal loan amount only if one of the following circumstances exist:
o The lower interest rate is not produced solely from discount points. In other words, the interest rate environment is such that some portion of the lower interest rate on the refinance loan is the result of favorable changes in the market as compared to the Veterans current rate. o The lower interest rate is produced solely from discount points; more than one discount point is added to the loan amount, and; the resulting loan balance after any fees and expenses maintains an LTV ratio of 90% or less. As a reminder, while the veteran may pay any reasonable amount of discount points in cash, no more than 2 discount points can be included in the loan amount of an IRRRL. o The lower interest rate is produced solely from discount points; discount points equal to or less than one discount point are added to the loan amount and; the resulting loan balance after any fees and expenses maintains an LTV ratio of 100% or less. • Valuation for Fixed to ARM IRRRLs: A new appraisal will be required to determine the LTV for Fixed to ARM IRRRLs. The appraisals do not need to be ordered through VA’s appraisal system. You can order through an AMC. Just as a reminder, the Veteran can only be charged for one appraisal. LTV is calculated by dividing the total loan amount by the value. The following appraisals are acceptable:
o Exterior Only Inspection Residential Appraisal Report form 2055 o Uniform Residential Appraisal Report form 1004
Section 1.09 Refinance Transactions Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 102 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.09 Refinance Transactions
o Exterior Only Inspection Individual Condominium Unit Appraisal Report form 1075 o Individual Condominium Unit Appraisal Report form 1075 o Industry standard acceptable appraisals for multi-unit homes. • A comparison statement is required to be disclosed to the veteran within 3 days of application and again at close. The statement must show the recoupment period for all fees, expenses and closing costs (this includes all escrows, funding fee, etc.) whether included in the loan or paid outside of closing. This differs that the recoupment calc that must be within 36 months. The comparison statement will gauge how the Veteran’s payment of taxes and amounts held in escrow, etc. will affect the cost of the new refinance loan. If there are any lender credits those can be subtracted prior to dividing by the decrease of P&I. If the IRRRL results in the same or increased monthly P&I payment, you still have to show the borrower the total costs (taxes, closing costs, VA funding fee, etc.) on the form. If the comparison calculation reflects the recoupment period exceeds 36 months, a statutory calculation will be required. This calculation includes all closing costs excluding VA funding fee and escrows, minus any lender credits divided by the P&I savings. This calculation MUST meet the 36 month or less fee recoupment requirement or the loan is ineligible. • IRRRLs resulting in the same or higher payments: veterans may not incur any fees, closing costs or expenses (other than taxes, amounts held in escrow and fees under chapter 37 (eg VA funding fee). Lender still must complete the comparison disclosure statement with the comparison recoupment calculation and provide it to the borrower. • The veteran has to communicate that he/she received the comparison statements via written letter, e-signature, email certifying receipt, system time/date stamp where the Veteran certified receipt.
Section 1.09 Refinance Transactions Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 103 of 107
CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines
Section 1.10 Adjustable Rate Mortgage (ARM) Transactions
1.10 Adjustable Rate Mortgage (ARM) Transactions
First Community Mortgage offers one type of adjustable rate mortgage for VA products. The traits outlined below are based off the One-Year Treasury Index and should be run through the Desktop Underwriting (DU) AUS. Loan Prospector (LP) should never be used for ARM loans.
ARM loans are only applicable to Purchases and Non-IRRRL transactions. ARM loans are not eligible for IRRRL or VA High Balance transactions.
Program ARM Margins First Annual Cap Lifetime Qualifying INDEX Code Type Adjustment after First Cap Rate Cap Adjustment VA5/1ARM 5 2.00 1 1 5 Note Rate CMT Year ARM
Section 1.10 ARM Transactions Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 103 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.11 Definitions
1.11 Definitions
Automated Underwriting System (AUS): General term for automated underwriting tools acceptable to First Community Mortgage, that includes: • Fannie Mae’s Desktop Underwriter® and • Freddie Mac’s Loan Prospector®
Combined Loan-To-Value or CLTV: The ratio calculated by adding the HELOC credit line limit to the mortgage amount plus any secondary financing and dividing that total by the value of the mortgaged premises. Co-op or Cooperative Project: A structure of two or more Cooperative Units in which a borrower obtains the right to occupy one of the Cooperative Units by purchasing stock in the Corporation that owns the structure and by executing a Proprietary Lease for the Cooperative Unit. Debt to Income or DTI ratio: A borrower’s DTI generally includes a “front-end” and “back-end” ratio. The front-end ratio, also known as a mortgage payment expense to effective income ratio, is calculated by taking the total mortgage payment and dividing it by the gross effective income. The back-end ratio, also known as the total fixed payments to effective income ratio, is calculated by taking the total obligations and dividing it by the gross effective income. Family Member: is defined as follows, regardless of actual or perceived sexual orientation, gender identity, or legal marital status:
• Child, parent or grandparent; o A child is defined as a son, stepson, daughter or stepdaughter o A parent or grandparent includes a step-parent/grandparent or foster parent/grandparent • Spouse or domestic partner • Legally adopted son or daughter, including a child who is placed with the borrower by an authorized agency for legal adoption • Foster child; • Brother, stepbrother; • Sister, stepsister; • Uncle; • Aunt; or
Section 1.11 Definitions Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 104 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.11 Definitions • Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister- in-law of the borrower. (Fiancé’s parents will be eligible if Fiancé will be on title and certifies occupancy).
Fannie Mae: The Federal National Mortgage Association, a federally chartered and privately-owned corporation, organized and existing under the Federal National Mortgage Association Charter Act, or any successor thereto. Federal Debt: A Federal debt is defined as • a Veterans Affairs guaranteed mortgage • a Title I loan • a Federal Student loan • a Small Business Administration (SBA) loan • delinquent Federal taxes, or • a lien, including taxes, placed against the borrower’s property for a debt owed to the U.S.
FHA: The Federal Housing Administration First Time Homebuyer: An individual who has had no ownership in a principal residence in the three years prior to the closing date of the loan OR an individual who, though having owned a home in the previous three years, owned a home with a former spouse while married and is no longer living in the property as evidenced by the divorce decree and/or separation agreement. Freddie Mac: The Federal Home Loan Mortgage Corporation, a corporate instrumentality of the United States created and existing under Title III of the Emergency Home Finance Act of 1970, as amended, or any successor thereto. Gift Funds: Gift funds are assets provided by a non-interested third party to the borrower. Interested Party: Interested parties include real estate agents, builders, developers, or anyone with an interest in the sale or refinance of the property. Loan-to-Value or LTV: The loan-to-value of a mortgage loan at the time of its origination, which shall be the ratio, expressed as a percentage, that the mortgage loan bears to the lesser of (i) the appraised value of the mortgaged property at origination (as determined by a true and accurate appraisal that satisfies the procedural and substantive requirements of the underwriting guidelines) or (ii) if the mortgage loan was made to finance the acquisition of the mortgaged property, the sales price of the mortgaged property.
Section 1.11 Definitions Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 105 of 107 CLICK HERE FOR TEMPORARY COVID-19 GUIDELINES
VA Underwriting Guidelines Section 1.11 Definitions Manufactured Home: A manufactured home, including all accessions thereto, that is legally classified as real property under applicable state law. Monthly Payment: The scheduled monthly payment of principal and/or interest, and any escrow payment, that is due each month on a mortgage loan. Mortgage: The mortgage, deed of trust or other security instrument creating a first lien on an estate in real property. Mortgage Loan: An individual Loan that is evidenced by a Mortgage Note and secured by a Mortgage and made in connection with the other documents included in the Mortgage Loan file (all of which are deemed included in the definition of "Mortgage Loan"). Mortgaged Property: The property pledged as security for the debt evidenced by a Mortgage Note. Mortgagee: The originator of any Mortgage Loan, as lender thereunder, together with its successors and assigns, as mortgagee thereunder. Mortgagor: The obligor on a Mortgage Note. Non-occupying borrower transaction: A non-occupying borrower transaction is a transaction involving two or more borrowers where one or more borrower will not occupy the property as the principal residence. Note: Document signed by a borrower as acknowledgment of the debt, and is, by inference, a promise to pay. Self-employed borrower: For FHA mortgage loan underwriting purposes, a self-employed borrower is a borrower with a 25 percent or greater ownership interest in a business. Third party contribution: A third party contribution is a payment by an interested third party, or a combination of parties, toward the borrower’s
• Closing costs, per ML 06-04 • Prepaid expenses • Discount points, and • Other financing concessions
Section 1.11 Definitions Return to Page 1 VA Programs 1.8.2021 Underwriting Guidelines Page 106 of 107