If your lender is unable to get an automated underwriting approval, or if you’ve been turned down with no explanation, it’s possible that it’s your lender, and not you, who is not qualified.
VA manual underwriting guidelines are designed to give an Underwriter guidance and the guidelines for manually underwriting, and approving a loan application.
There are many lenders that simply do not manually underwrite VA loans. When choosing a lender, this is something that you want to research when you’re first applying for a VA loan.
A lender that has the experience of manually underwriting a VA loan can give you a second chance if the automated underwriting system decision comes back with a refer/eligible finding, or if certain conditions are present at the time of underwriting.
If you are applying for a VA guaranteed loan, choose a loan officer that has experience with VA loans, and more specifically, VA manual underwriting guidelines.
There are many reasons why a VA manual underwriting downgrade can happen. In some cases, it could be that your loan officer or underwriter did not structure your loan properly.
If your loan officer is inexperienced, or if their lender is not aggressive with underwriting their interpretation of the guidelines, your chances of receiving an automated underwriting decision significantly go down.
Getting approved for a VA loan can be a confusing process. Many veterans have questions about manual underwriting and how it differs from the standard underwriting process. As a leading VA lender I want to provide clear detailed information to help demystify manual underwriting.
What is Manual Underwriting?
Manual underwriting simply means that a human underwriter will closely evaluate your VA loan application and make the approval decision. This contrasts with automated underwriting systems (AUS) that provide a computerized credit risk assessment.
Here are some key things to know
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Manual underwriting involves more stringent scrutiny of your finances. The underwriter will dive deep into documents like bank statements, pay stubs, credit reports and more.
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Certain credit situations like bankruptcy or foreclosure often require manual underwriting. The human eye provides more nuance.
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VA loans facing manual underwriting tend to need lower debt-to-income ratios, more credit explanation letters and documentation.
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You may have to provide extra verification like a rent history or live rent-free letter to show you can handle a mortgage payment.
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Manual underwriting represents the VA’s commitment to helping veterans get financing even after facing credit challenges.
While manual underwriting adds steps, it ultimately provides more Veterans a path to homeownership.
When Does Manual Underwriting Happen?
There are certain cases when your VA loan will exit the automated underwriting systems and need manual underwriting:
- Thin credit files or lack of substantial credit history
- Bankruptcy in the past 2 years
- Federal debts that went into default or collections
- Late mortgage payments on your credit report
- Foreclosure or short sale on your record
- Debt-to-income ratios (DTI) above 50%
The presence of these credit issues will trigger a manual underwrite. The human eye is needed to properly weigh credit risks that automated systems can’t fully account for.
Tighter Requirements on Manual Underwriting
When your VA loan enters manual underwriting, you’ll likely face stricter standards in a few key areas:
Lower DTI Ratios
On an automated underwrite, some lenders may allow total debt ratios up to 60%. But for manual underwrites, that figure is capped around 45-50% in most cases. Some lenders have compensating factors that permit a DTI above 50%, but it’s uncommon.
Extra Rent Verification
If you currently rent instead of owning a home, lenders will want a verification of rent (VOR) to prove 12 months of solid rental payments. This lessens concerns over payment shock when transitioning from renting to owning.
Stronger Credit Explanations
Any major derogatory credit events will require detailed explanation letters showing the circumstances that led to the issue are resolved. Veterans facing bankruptcy or foreclosure in the past will especially need convincing letters.
Less Documentation Flexibility
With an automated underwrite, lenders can exercise more discretion regarding document types and needs. But on a manual underwrite, documentation requirements are usually far more rigid. Expect to provide every W-2, pay stub, bank statement and anything else requested.
Lower Maximum Loans
Some lenders restrict maximum loan sizes for manual underwrites. While VA loans go up to $647,200 in most areas, lenders may cap loans around $453,100 for manual files as an extra precaution. Always ask your lender about their specific policies.
Step-by-Step Process of Manual Underwriting
While individual lender practices can vary, this provides a general overview of the manual underwriting process:
- Application submitted and assessed by underwriter
- Credit report obtained showing all tradelines, late payments, collections, etc.
- Income verified via recent pay stubs, W-2s, tax returns covering 2 years
- Assets verified through recent bank statements, retirement accounts, etc.
- Debts analyzed, including mortgage/rental history, car loans, credit cards, student loans, etc.
- DTI ratio calculated from verified income and debts
- Explanation letters requested for any credit concerns like bankruptcy or collections
- Rental history established if needed through VOR document or rent-free letter
- Final loan decision made based on risk analysis
Throughout the process, you’ll need to quickly provide any extra documents the underwriter requests to avoid delays. Strong communication is key.
Tips for Smooth Manual Underwriting
Here are some tips to help your VA loan sail through manual underwriting:
- Get organized – Have 2 years of financial documents ready like bank statements, W-2s, tax returns, and pay stubs. This prevents hang-ups.
- Explain issues – Draft letters explaining any credit mishaps now to avoid a lengthy back-and-forth later.
- Mind the ratios – Get debts paid down to keep your DTI at 50% or below before applying.
- Check rent history – Gather 12 months of on-time rent payments via canceled checks, letters, bank records.
- Watch new credit – Don’t open new accounts or let any payments fall behind during the process.
- Communicate constantly – Respond immediately to any underwriter questions to prevent delays.
Following these tips sets you up for success even when facing manual VA underwriting.
Why Manual Underwriting Represents Hope
It’s easy to feel anxious or defeated when your VA loan requires manual underwriting. But I see it as a sign of hope and a chance to own a home after facing financial difficulties.
Rather than a punishment, manual underwriting is the VA’s way of taking a more understanding, personalized look at your finances if you’ve been through hard times. They want to help responsible, qualified Veterans buy homes.
While approval is never 100% guaranteed, Veterans should feel encouraged that manual underwriting exists. It provides a path forward that is far more accommodating than conventional lending.
Partner With a Trusted VA Lender
Having an experienced VA lender in your corner is vital for smooth manual underwriting. As one of the top VA lenders nationwide, we have dedicated in-house underwriters specially trained on VA guidelines.
Our underwriters take a balanced approach – rigorously verifying your ability to repay the loan while exercising flexibility allowed by VA standards.
We’ll provide straight talk on what’s needed for approval while supporting you each step of the way. Our commitment to serving Veterans shows in our 82% approval rate on manual underwrites – significantly above the 68% national average.
The Bottom Line
Manual underwriting brings extra steps, but with proper preparation it’s navigable for Veterans. View it as the VA extending a hand to those who have stumbled financially. Be organized, transparent and work closely with your lender.
While approval is never assured, Veterans shouldn’t let the manual underwriting label deter them. It’s a chance to put past mistakes behind you and get the keys to a new home using your hard-earned benefits.
System Override and Manual Downgrade
A system override and/or manual downgrade of an Accept/Approve to a Refer classification may be required if a particular loan application variable is revealed during loan processing.
A system override occurs when something appears on the loan application that triggers a requirement that an underwriter reviews the loan file.
A manual downgrade becomes necessary if additional information, not considered in the AUS decision, affects the overall insurability or eligibility of a mortgage otherwise rated as an Accept or Approve.
Both systems overrides and manual downgrades may be triggered by inaccuracies in credit reporting, by eligibility issues, when a case file cannot be documented according to the automated underwriting system findings, and for other reasons including the unlikely failure of the automated underwriting system to recognize a derogatory credit item.
Manual Downgrade – Credit Issues
Credit issues that appear in the file can trigger an automatic downgrade, and require your VA loan to follow manual underwriting guidelines. Here are a few of the most common credit issues that will result in a manual downgrade.
Previous Mortgage Foreclosure: A borrower whose previous residence or other real property was foreclosed on or has given a deed-in-lieu of foreclosure within the previous two years is generally not eligible for an insured mortgage.
There are some lenders that, with documented exceptions, will manually underwrite the loan application and look for compensating factors if the foreclosure or deed in lieu occurs in less than 2 years from the application date.
Providing the foreclosure was completed at least two years previously and the risk-classification from the AUS is an Accept/Approve, no further documentation regarding the foreclosure is required.
Mortgage History: Late mortgage payments during the most recent 12 months consisting of greater than 1×30 days late on a purchase or a rate/term refinance, or greater than 0 x 30 on a cash-out refinance.
Bankruptcy: Both Chapter 7 bankruptcies discharged within two years of a loan application will require a manual downgrade. If your bankruptcy has been discharged less than one year is not eligible for a VA guaranteed mortgage. Providing the bankruptcy was discharged at least two years previously and the risk-classification from DU is an Accept/Approve, no further documentation regarding the bankruptcy is required. Chapter 13 settlements have different rules and once laid out in a repayment plan with some time of proof of payments made.
Disputed Accounts: If your credit report reveals that there are any disputed credit accounts or public records, the mortgage application must be referred for manual underwriting review.
When manually underwriting your VA loan, the underwriter is doing a combination of things. In some cases, the underwriter is only looking for alternative documentation to satisfy a requirement of the automated underwriting decision.
Compensating factors will allow an underwriter to “offset” credit profile deficiencies by documenting that there are sufficient conditions that reduce the risk of default.
Compensating factors may affect the loan decision. These factors are especially important when reviewing loans that are marginal with respect to residual income or debt-to-income ratio. They cannot be used to compensate for unsatisfactory credit.
Valid compensating factors should logically be able to compensate (to some extent) for the identified weakness in the loan. For example, significant liquid assets may compensate for a residual income shortfall whereas long-term employment would not.
Compensating factors include, but are not limited to the following:
- excellent credit history,
- conservative use of consumer credit,
- minimal consumer debt,
- long-term employment,
- significant liquid assets,
- sizable downpayment,
- the existence of equity in refinancing loans,
- little or no increase in shelter expense,
- military benefits,
- satisfactory homeownership experience,
- high residual income,
- low debt-to-income ratio,
- tax credits for child care, and
- tax benefits of homeownership.
How to do a VA loan manual underwrite
FAQ
Can you do a manual underwrite on a VA loan?
Do lenders still do manual underwriting?
Is manual underwriting a good idea?
What are the DTI requirements for VA manual underwriting?
What are VA manual underwriting guidelines?
VA manual underwriting guidelines are designed to give an Underwriter guidance and the guidelines for manually underwriting, and approving a loan application. There are many lenders that simply do not manually underwrite VA loans. When choosing a lender, this is something that you want to research when you’re first applying for a VA loan.
How is a VA loan underwritten?
There are two ways a VA loan can be underwritten: The VA loan automated underwriting system (AUS) and via manual underwriting. By default, all loans go through AUS. Lenders use the system to analyze a borrower’s basic financial details (income, credit score, etc.) against the VA’s basic underwriting requirements.
Do VA loan applications require manual underwriting?
Residual income. VA loan applications are among those most referred for manual underwriting. That’s because VA loans are a way of giving back to our veterans (and their families) as a thanks for their service, so lenders go out of their way to approve these loans if possible.
Why do I get a VA manual underwriting downgrade?
If you are applying for a VA guaranteed loan, choose a loan officer that has experience with VA loans, and more specifically, VA manual underwriting guidelines. There are many reasons why a VA manual underwriting downgrade can happen. In some cases, it could be that your loan officer or underwriter did not structure your loan properly.