Chapter 4

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

4-1

Chapter 4. Credit Underwriting

Overview

In this Chapter

This chapter contains the following topics.

Topic

Topic Name

See

Page

How to Underwrite a VA-Guaranteed Loan

4-2

Income

4-6

Income Taxes and Other Deductions from Income

4-25

Assets

4-27

Debts and Obligations

4-29

Required Search for and Treatment of Debts Owed to the

Federal Government

4-34

Credit History

4-40

Documentation for Automated Underwriting Cases

4-46

How to Complete VA Form 26-6393, Loan Analysis

4-54

How to Analyze the Information on VA Form 26-6393

4-59

Examples of Underwriting Deficiencies

4-63

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

4-2

1. How to Underwrite a VA-Guaranteed Loan

Change Date

April 10, 2009, Change 10

 This section has been updated to correct hyperlinks and to make minor

grammatical edits.

a. VA

Underwriting

Standards

VA loans involve a veteran’s benefit. Therefore, lenders are encouraged to

make VA loans to all qualified veterans who apply.

VA’s underwriting standards are intended to provide guidelines for lenders’

underwriters as well as VA’s 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.

b. Basic

Requirements

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.

VA’s underwriting standards are incorporated into VA regulations at 38 CFR

36.4337 and explained in this chapter. This chapter addresses the

verifications, procedures, and analysis involved in underwriting a VA-

guaranteed loan. It provides guidance on how to treat income, debts and

obligations, credit history, and so on, and how to present and analyze these

items on VA’s loan analysis form. It 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.

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

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1. How to Underwrite a VA-Guaranteed Loan, Continued

c. Lender

Responsibility

Lenders are responsible for:

 developing all credit information,

 properly obtaining all required verifications and the credit report,

 ensuring the accuracy of all information on which the loan decision is

based,

 complying with the law and regulations governing VA’s underwriting

standards, and with VA’s underwriting policies, procedures, and guidelines,

and

 certifying as to compliance with all of the above.

d. Lender

Procedures

Section 2 of chapter 5 provides an overview of all procedures which must be

completed when making a VA loan. The procedures below address only the

credit underwriting of the loan.

Step

Action

Initiate the VA and Credit Alert Interactive Voice Response

System (CAIVRS) inquiries described in section 6 of this chapter.

Obtain all necessary verifications.

The applicant’s authorization can be obtained for each verification

needed, or on one blanket authorization form (attach a copy of the

blanket authorization to each verification requested, including VA

Form 26-8937, Verification of VA Benefits, if applicable).

The credit report and verifications can be ordered by the lender or

its agent or a party designated by the lender to perform that

function. However, these documents must always be delivered by

the credit reporting agency or verifying party directly to the lender

or its agent, and never to another party. That is, while a lender

may delegate authority for a builder, realtor, or other person to

order the report for the lender, the report may not be delivered to

such builder, realtor, and so on, and may not pass through the

hands of any such party or the applicant.

Compare similar information received from different sources and

resolve any discrepancies. For example, the number of dependents

provided on the Uniform Residential Loan Application, tax

returns, credit report, and so on, should be the same. In addition,

the status of debts provided on the URLA and credit report should

be the same.

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

4-4

1. How to Underwrite a VA-Guaranteed Loan, Continued

d. Lender Procedures (continued)

Step

Action

Complete VA Form 26-6393, Loan Analysis, in conjunction with a

careful review of the loan application and supporting

documentation.

The form is not required for Interest Rate Reduction Refinancing

Loans (except IRRRLs to refinance delinquent VA loans).

Indicate the loan decision in item 50 of the Loan Analysis after

ensuring that the treatment of income, debts, and credit is in

compliance with VA underwriting standards.

Loans closed by an automatic lender

The underwriter must certify review and approval of the loan by

signing item 51 of the Loan Analysis (for Automated

Underwriting cases, see section 8 of this chapter).

Note: For nonsupervised automatic lenders, line 51 signature must

be a VA-approved underwriter.

Prior approval loans

The individual with authority to determine that the loan meets VA

credit standards and should be submitted to VA, must sign item 51

of the Loan Analysis.

An officer of the lender authorized to execute documents and act

on behalf of the lender must complete the following certification:

“The undersigned lender certifies that the loan application, all

verifications of employment, deposit, and other income and credit

verification documents have been processed in compliance with 38

CFR Part 36; that all credit reports obtained in connection with the

processing of this borrower’s loan application have been provided

to VA; that, to the best of the undersigned lender’s knowledge and

belief, the loan meets the underwriting standards recited in chapter

37 of Title 38 United States Code and 38 CFR Part 36; and that all

information provided in support of this loan is true, complete and

accurate to the best of the undersigned lender’s knowledge and

belief.”

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

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1. How to Underwrite a VA-Guaranteed Loan, Continued

e. Underwriting

Special Types

of Loans

The underwriting standards and procedures explained in this chapter apply to

these special types of loans generally. However, some special underwriting

considerations also apply and can be found as follows:

Type of Loan

Chapter

Section

Joint Loans

Energy Efficient Mortgages (EEMs)

Graduated Payment Mortgages (GPMs)

Growing Equity Mortgages (GEMs)

Loans Involving Temporary Interest Rate Buydowns

Farm Residence Loans

f. Refinancing

Loans

While the underwriting standards detailed in this chapter apply to “cash-out”

refinances, IRRRLs generally do not require any underwriting.

IRRRLs made to refinance VA loans 30 days or more past due must be

submitted to VA for prior approval. It must be reasonable to conclude that:

 the circumstances that caused the delinquency have been corrected, and

 the veteran can successfully maintain the new loan.

Reference: See chapter 6 for details on all types of refinancing loans.

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

4-6

2. Income

Change Date

April 10, 2009, Change 10

 This section has been updated to correct hyperlinks and to make minor

grammatical edits.

 Subsection m has been updated by removing the requirement that lenders

must obtain a statement regarding a person’s membership in the Reserves or

National Guard.

Underwriter’s

Objectives

Identify and verify income available to meet:

 the mortgage payment,

 other shelter expenses,

 debts and obligations, and

 family living expenses.

Evaluate whether verified income is:

 stable and reliable,

 anticipated to continue during the foreseeable future, and

 sufficient in amount.

b. Importance

of Verification

Only verified income can be considered in total effective income.

c. Income of a

Spouse

Verify and treat the income of a spouse who will be contractually obligated

on the loan the same as the veteran’s income.

To ensure compliance with the Equal Credit Opportunity Act (ECOA), do not

ask questions about the income of an applicant’s spouse unless the:

 spouse will be contractually liable,

 applicant is relying on the spouse’s income to qualify,

 applicant is relying on alimony, child support, or separate maintenance

payments from the spouse or former spouse, or

 applicant resides in a community property State or the security is in such a

State.

Note: In community property States, information concerning a spouse may

be requested and considered in the same manner as for the applicant, even if

the spouse will not be contractually obligated on the loan.

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

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2. Income, Continued

d. ECOA

Considerations

Restrict inquiries related to the applicant’s spouse to the situations listed in

the “Income of a Spouse” heading in this section.

Always inform the applicant (and spouse, if applicable) that they do not have

to divulge information on the receipt of child support, alimony, or separate

maintenance. However, in order for this income to be considered in the loan

analysis, it must be divulged and verified.

Income cannot be discounted because of sex, marital status, age, race, or other

prohibited bases under ECOA.

Treat income from all sources equally; that is, the fact that all or part of an

applicant’s income is derived from any public assistance program is not

treated as a negative factor, provided the income is stable and reliable.

e. Income from

Non-Military

Employment

Verification: General Requirement

Verify a minimum of 2 years employment.

If the applicant has been employed by the present employer less than 2 years:

 verify prior employment plus present employment covering a total of 2

years,

 provide an explanation of why 2 years employment could not be verified,

 compare any different types of employment verifications obtained (such as,

Verification of Employment (VOE), pay stubs, and tax returns for

consistency), and

 clarify any substantial differences in the data that would have a bearing on

the qualification of the applicant.

Verification: Employment Verification Services

Lenders may use VOEs supplied by an employment verification service only

if VA has approved the use of VOEs from that particular provider. VA has

approved “FULL” verifications of employment through “The Work Number

for Everyone,” a service of the TALX Corporation. (No pay stub is needed

with the TALX verification.)

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

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2. Income, Continued

e. Income from

Non-Military

Employment

(continued)

Verification: Standard Documentation

Acceptable verification consists of:

 VA Form 26-8497, Request for Verification of Employment, or any format

which furnishes the same information as VA Form 26-8497, plus

 a pay stub if the employer normally provides one to the applicant.

If the employer does not indicate the probability of continued employment on

the VOE, the lender is not required to request anything additional on that

subject.

The VOE and pay stub must be no more than 120 days old (180 days for new

construction).

 For loans closed automatically, the date of the VOE and pay stub must be

within 120 days of the date the note is signed (180 days for new

construction).

 For prior approval loans, the date of the VOE and pay stub must be within

120 days of the date the application is received by VA (180 days for new

construction).

The VOE must be an original. The pay stub may be an original or a copy

certified by the lender to be a true copy of the original.

Note: It is acceptable for Department of Defense civilian employees to

provide computer generated pay stubs accessed through myPay (formerly

known as E/MSS - Employee Member Self Service).

Verification: Additional Documentation for Persons Employed in the

Building Trades or Other Seasonal or Climate-Dependent Work

In addition to the standard documentation (VOE and pay stub), obtain:

 documentation evidencing the applicant’s total earnings year to date,

 signed and dated individual income tax returns for the previous 2 years, and

 if applicant works out of a union, evidence of the union’s history with the

applicant.

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

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2. Income, Continued

e. Income from

Non-Military

Employment

(continued)

Verification: Alternative Documentation

Alternative documentation may be submitted in place of a VOE if the lender

concludes that the applicant’s income is stable, reliable, and anticipated to

continue during the foreseeable future; that is, if the applicant’s income

qualifies as effective income. 2 years employment is not required to reach this

conclusion.

Alternative documentation consists of:

 Pay stubs covering at least the most recent 30-day period.

Note: It is acceptable for Department of Defense civilian employees

to provide computer generated pay stubs accessed through myPay (formerly

known as E/MSS - Employee Member Self Service).

 W-2 forms for the previous 2 years.

 Telephone verification of the applicant’s current employment.

Note: Document the date of verification and the name, title, and telephone

number of the person with whom employment was verified.

If the employer is not willing to give telephone verification of applicant’s

employment or the pay stubs or W-2 forms are in any way questionable as to

authenticity, use standard documentation. Alternative documentation cannot

be used.

Pay stubs and W-2 forms may be originals or copies certified by the lender to

be true copies of the originals.

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

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2. Income, Continued

e. Income from

Non-Military

Employment

(continued)

Verification: Fax and Internet

Fax and Internet documentation may be submitted in place of a VOE if the

lender concludes that the applicant’s income is stable, reliable, and

anticipated to continue during the foreseeable future; that is, if the applicant’s

income qualifies as effective income.

Fax and Internet documentation consists of:

 the same information contained in a standard VOE,

 clear identification of the employer and source of information, and

 name and telephone number of a person who can verify faxed information.

Lenders are responsible for ensuring the authenticity of the documents. For

Faxed documents, review the “banner” information provided at the top of

each page of the fax. For Internet documents, review the information

contained on any headers/footers and the banner portion of the downloaded

webpage(s). These pages must contain the uniform resource locator (URL)

and the date and time printed. The documents should also be reviewed for

errors such as incorrect area codes, unreadable names or income, etc.

Analysis: General Guidance

Income analysis is not an exact science. It requires the lender to underwrite

each loan on a case-by-case basis, using:

 judgment,

 common sense, and

 flexibility, when warranted.

Analyze the probability of continued employment (that is, whether income is

stable and reliable) by examining the:

 applicant’s past employment record,

 applicant’s training, education, and qualifications for his/her position,

 type of employment, and

 employer’s confirmation of continued employment, if provided.

In the applicant’s current position, 2 years of employment is a positive

indicator of continued employment. It is not a required minimum and not

always sufficient by itself to reach a conclusion on the probability of

continued employment.

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

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2. Income, Continued

f. Analysis:

Applicant

Employed Less

Than 12

Months

Generally, employment less than 12 months is not considered stable and

reliable. However, it may be considered stable and reliable if the individual

facts warrant such a conclusion. Carefully consider the employer’s

evaluation of the probability of continued employment, if provided.

Assess whether the applicant’s training and/or education equipped him or her

with particular skills that relate directly to the duties of his/her current

position. This generally applies to skilled positions. Examples include nurse,

medical technician, lawyer, paralegal, and computer systems analyst.

If the probability of continued employment is high based on these factors,

then the lender may give favorable consideration to including the income in

the total effective income. An explanation of why income of less than 12

months duration was used must accompany the loan submission.

If the probability of continued employment is good, but not as well supported,

the lender may still consider the income if the applicant has been employed at

least 6 months to partially offset debts of 10 to 24 months duration.

Determine the amount which can be used, based on such factors as:

 the employer’s evaluation of the probability of continued employment, if

provided, and

 the length of employment (for example, 10 months versus 6 months).

Note: Include an explanation with the loan submission.

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

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2. Income, Continued

g. Analysis:

Recent History

of Frequent

Changes of

Employment

Short-term employment in a present position combined with frequent changes

of employment in the recent past requires special consideration to determine

stability of income. Analyze the reasons for the changes in employment.

Reference: See section 4 of “Current Issues” for a discussion of frequent job

changes by individuals with low-to-moderate incomes.

Give favorable consideration to changes for the purpose of career

advancement in the same or related field.

Favorable consideration may not be possible for changes:

 with no apparent betterment to the applicant, and

 from one line of work to another.

If the lender includes applicant’s income in effective income, an explanation

must accompany the loan submission.

h. Income from

Overtime

Work, Part-

time Jobs,

Second Jobs,

and Bonuses

Generally, such income cannot be considered stable and reliable unless it has

continued (and is verified) for 2 years.

To include income from these sources in effective income:

 the income must be regular and predictable, and

 there must be a reasonable likelihood that it will continue in the foreseeable

future based on

 its compatibility with the hours of duty and other work conditions of the

applicant’s primary job, and

 how long the applicant has been employed under such arrangement.

The lender may use this income, if it is not eligible for inclusion in effective

income, but is verified for at least 12 months, to offset debts of 10 to 24

months duration. Include an explanation.

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

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2. Income, Continued

i. Income from

Commissions

Verification

When all or a major portion of the applicant’s income is derived from

commissions, obtain the following documentation:

 VOE or other written verification which provides the following:

 the actual amount of commissions paid year-to-date.

 the basis for payment (that is, salary plus commission, straight commission,

or draws against commission).

 when commissions are paid (that is, monthly, quarterly, semiannually, or

annually).

 Individual income tax returns, signed and dated, plus all applicable

schedules for the previous 2 years (or additional periods if needed to

demonstrate a satisfactory earnings record).

Analysis

Generally, income from commissions is considered stable when the applicant

has obtained such income for at least 2 years.

 Less than 2 years cannot usually be considered stable unless the applicant

has had previous related employment and/or extensive specialized training.

 Less than 2 year can rarely qualify. In-depth development is required for a

conclusion of stable income on less than 1 year cases.

Continued on next page

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Chapter 4: Credit Underwriting

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2. Income, Continued

j. Self-

Employment

Income

Verification

Obtain the following documentation:

 current financial statements prepared in a generally recognized format,

including:

- year-to-date profit and loss statement

- current balance sheet

Note: The financial statements must be sufficient for a loan underwriter to

determine the necessary information for loan approval. The lender may

require accountant-prepared financial statements or financial statements

audited by a Certified Public Accountant if needed to make such a

determination due to the nature of the business or the content of the financial

statements.

 individual income tax returns, signed and dated, plus all applicable

schedules for the previous 2 years (or additional periods if needed to

demonstrate a satisfactory earnings record).

 if the most recent year’s tax return has not yet been prepared, provide a

profit and loss statement for that year, and

 if the business is a corporation or partnership

- copies of the signed federal business income tax returns for the previous

2 years plus all applicable schedules, and

- a list of all stockholders or partners showing the interest each holds in the

business.

Note: Obtain a written credit report on the business as well as the applicant

as needed.

Analysis

Generally, income from self-employment is considered stable when the

applicant has been in business for at least 2 years.

 Less than 2 years cannot usually be considered stable unless the applicant

has had previous related employment and/or extensive specialized training.

 Less than 1 year can rarely qualify.

 In-depth development is required for a conclusion of stable income on less

than 1 year cases.

Continued on next page

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Chapter 4: Credit Underwriting

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2. Income, Continued

j. Self-

Employment

Income

(continued)

Analyze the general economic outlook for similar businesses to determine

whether the business can be expected to generate sufficient income for the

applicant’s future needs.

If the business shows a steady or significant decline in earnings over the

period analyzed, the reasons for such decline must be analyzed to determine

whether the trend is likely to continue or be reversed.

If the business is unusual and it is difficult to determine the probability of

continued operation, obtain an opinion on viability and future earnings, and

an explanation of the function and financial operations of the business from a

qualified party.

Depreciation claimed as a deduction on the tax returns and financial

statements of the business may be included in effective income.

k. Active

Military

Applicant’s

Income

Verification

A military Leave and Earnings Statement (LES) is required instead of a VOE.

 The LES must furnish the same information as a VOE.

 The LES must be no more than 120 days old (180 days for new

construction).

 For loans closed automatically, the date of the LES must be within 120 days

of the date the note is signed (180 days for new construction).

 For prior approval loans, the date of the LES must be within 120 days of the

date the application is received by VA (180 days for new construction).

The LES must be an original or a copy certified by the lender to be a true

copy of the original.

Note: The Department of Defense provides service members access to a

computer generated LES through myPay (formerly known as E/MSS -

Employee Member Self Service). This type of LES is acceptable.

In addition, identify servicemembers who are within 12 months of release

from active duty or end of contract term. Find the date of expiration of the

applicant’s current contract for active service on the LES (for an enlisted

servicemember). For a National Guard or Reserve member, find the

expiration date of the applicant’s current contract.

Continued on next page

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Chapter 4: Credit Underwriting

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2. Income, Continued

k. Active

Military

Applicant’s

Income

(continued)

Verification (continued)

If the date is within 12 months of the anticipated date that the loan will close,

the loan package must also include one of the following four items, or

combinations of items, to be acceptable:

 documentation that the servicemember 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

 verification of a valid offer of local civilian employment 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

 a statement from the servicemember that he/she intends to reenlist or extend

his/her period of active duty to a date beyond the 12 month period, plus

 a statement from the servicemember’s commanding officer confirming that:

- the servicemember is eligible to reenlist or extend his/her active duty as

indicated, and

- the commanding officer has no reason to believe that such reenlistment

or extension of active duty will not be granted, or

 documentation of other unusually strong positive underwriting factors, such

as:

- a downpayment of at least 10 percent,

- significant cash reserves, and

- clear evidence of strong ties to the community coupled with a

nonmilitary spouse’s income so high that only minimal income from the

active duty servicemember is needed to qualify.

Analysis: Base Pay

Consider the applicant’s base pay as stable and reliable except if the applicant

is within 12 months of release from active duty.

 Analyze the additional documentation submitted.

 If the applicant will not be reenlisting, determine whether:

- the applicant’s anticipated source of income is stable and reliable, and/or

- unusually strong underwriting factors compensate for any unknowns

regarding future sources of income.

Continued on next page

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Chapter 4: Credit Underwriting

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2. Income, Continued

k. Active

Military

Applicant’s

Income

(continued)

Analysis: Military Quarters Allowance

The lender may include a military quarters allowance in effective income if

properly verified. In most areas there will be an additional variable housing

allowance, which can also be included.

The military quarters and variable housing allowances are not taxable

income.

Ensure that the applicant meets the occupancy requirements set forth in

section 5 of chapter 3.

Verification: Subsistence and Clothing Allowances

Any subsistence (rations) and clothing allowances are indicated on the LES.

Analysis: Subsistence and Clothing Allowances

The lender may include verified allowances in effective income. These

allowances are not taxable income.

Note: The clothing allowance generally appears on the LES as an annual

amount. Convert it to a monthly amount for the loan analysis.

Verification: Other Military Allowances

To consider a military allowance in the underwriting analysis, obtain

verification of the type and amount of the military allowance, and how long

the applicant has received it.

Analysis: Other Military Allowances

Examples include propay, flight or hazard pay, overseas pay, and combat pay.

All of these are subject to periodic review and/or testing of the recipient to

determine continued eligibility. These types of allowances are considered

taxable income by the IRS, unlike housing, clothing, and subsistence

allowances.

Military allowances may be included in effective income only if such income

can be expected to continue because of the nature of the recipient’s assigned

duties.

Example: Flight pay verified for a pilot. If duration of the military

allowance cannot be determined, this source of income may still be used to

offset obligations of 10 to 24 months duration.

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

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2. Income, Continued

l. Income from

Service in the

Reserves or

National Guard

Income derived from service in the Reserves or National Guard may be

included in effective income if the length of the applicant’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 of 10 to 24 months

duration.

m. Recently

Activated

Members of the

Reserve or

National Guard

Lenders must consider if an applicant, whose income is being used to qualify

for a loan, may have a change in income due to participation in a Reserves/

National Guard unit subject to activation.

If so, lenders must determine what the applicant’s income may be if activated:

 Reduced, carefully evaluate the impact the reduction may have on the

borrower’s ability to repay the loan.

 Increased, consider the likelihood the income will continue beyond a 12-

month period.

Example: If an activated reserve/guard member applies for a loan, they may

present orders indicating their tour of duty is not to exceed 12 months. Under

these circumstances lenders need to carefully evaluate both the present

income (current employment) and expected income (reservist income) in

terms of income stability and reliability.

There are no 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, etc., and make the best decision for each

loan regarding the use of income in qualifying for the loan.

Continued on next page

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Chapter 4: Credit Underwriting

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2. Income, Continued

m. Recently

Activated

Members of the

Reserve or

National Guard

(continued)

It is very important that loan files be carefully and thoroughly

DOCUMENTED, including any reasons for using or not using reservist

income in these situations.

Weigh the desire to provide a veteran their benefit with the responsibility to

ensure the veteran will not be placed in a position of financial hardship.

Lenders should contact the appropriate VA office if any questions arise in

reference to unusual circumstances regarding a mobilized servicemember’s

income.

n. Income of

Recently

Discharged

Veterans

Verification

Obtain verification of any of the following which apply:

 employment income

Reference: See “Income from Non-Military Employment” in this section for

verification requirements.

 retirement income, and

 military separation payments.

If the applicant has been employed in a position for only a short time, obtain a

statement from the employer that the applicant is performing the duties of the

job satisfactorily and the probability of continued employment is favorable.

Analysis: Prospects for Continued Employment

Cases involving recently discharged veterans often require the underwriter to

exercise a great deal of flexibility and judgment in determining whether the

employment income will continue in the foreseeable future. This is because

some veterans may have little or no employment experience other than their

military occupation. Continuity of employment is essential for a veteran with

no retirement income or insufficient retirement income to support the loan

obligation.

Continued on next page

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Chapter 4: Credit Underwriting

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2. Income, Continued

n. Income of

Recently

Discharged

Veterans

(continued)

For recently discharged veterans who have been in their new jobs only a very

short time, analyze prospects for continued employment as follows:

 If the duties the applicant performed in the military are similar or directly

related to the duties of the present position, use this as one indicator that the

employment is likely to continue.

 If the applicant’s current job requires skills for which the applicant has had

no training or experience, greater time in the current job may be needed to

establish stability.

If the applicant’s retirement income, compared to total estimated shelter

expense, long-term debts, and family living expense is such that only minimal

income from employment is necessary to qualify from the income standpoint,

resolve doubt in favor of the applicant.

Examples:

Qualifying short-term employment - An applicant who was an airplane

mechanic in the military is now employed as an auto mechanic or machinist.

Nonqualifying short-term employment - An applicant who was an Air Force

pilot is now employed as an insurance salesperson on commission.

Most cases fall somewhere between these extremes. Fully develop the facts

of each case in order to make a determination.

Apply the guidelines under “Self-Employment Income” in this section to a

recently discharged veteran who is self-employed.

Analysis: Voluntary Separation Payments

Two types of voluntary separation payments are used to facilitate military

downsizing:

(1) Special Separation Benefit (SSB)

 A one-time lump sum,

 Taxable in the year received, and

 Treat the same as any substantial cash reserve.

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

4-21

2. Income, Continued

n. Income of

Recently

Discharged

Veterans

(continued)

(2) Voluntary Separation Incentive (VSI)

 Annual payments

 Taxable in the year received

 Include in effective income

 Calculated by multiplying the veteran’s years of service times two

 Requires a minimum of 6 years service (equates to a minimum of 12 years

annual payments)

If the veteran receives both VSI and VA disability compensation payments,

the VSI is reduced by the amount of disability compensation. However, if the

disability compensation is related to an earlier period of service and the VSI a

later period of service, the VSI is not reduced by the amount of disability

compensation.

VSI is reduced by the amount of any base pay or compensation a member

receives for active or reserve service, including inactive duty training.

The veteran can designate a beneficiary for VSI payments in the event of

death.

o. Rental

Income

Verification: Multi-Unit Property Securing the VA Loan

Verify:

 cash reserves totaling at least 6 months mortgage payments (principal,

interest, taxes, and insurance - PITI), and

 documentation of the applicant’s prior experience managing rental units or

other background involving both property maintenance and rental.

Analysis: Multi-Unit Property Securing the VA Loan

Include the prospective rental income in effective income only if:

 evidence indicates the applicant has a reasonable likelihood of success as a

landlord, and

 cash reserves totaling at least 6 months mortgage payments are available.

The amount of rental income to include in effective income is based on 75

percent of:

 verified prior rent collected on the units (existing property), or

 the appraiser’s opinion of the property’s fair monthly rental (proposed

construction).

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

4-22

2. Income, Continued

o. Rental

Income

(continued)

Note: A percentage greater than 75 percent may be used if the basis for such

percentage is adequately documented.

Verification: Rental of the Property Applicant Occupied Prior to the New

Loan

Obtain a copy of the rental agreement on the property, if any.

Analysis: Rental of the Property Applicant Occupied Prior to the New Loan

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.

Verification: Rental of Other Property Not Securing the VA Loan

Obtain the following:

 documentation of cash reserves totaling at least 3 months mortgage

payments (principal, interest, taxes, and insurance - PITI), and

 individual income tax returns, signed and dated, plus all applicable

schedules for the previous 2 years, which show rental income generated by

the property.

Analysis: Rental of Other Property Not Securing the VA Loan

Rental income verified as stable and reliable may be included in effective

income. If there is little or no prior rental history on the property, make a

determination based on review of:

 documentation of the applicant’s prior experience managing rental units or

other background involving both property maintenance and rental

 any leases on the property, and

 the strength of the local rental market.

Property depreciation claimed as a deduction on the tax returns may be

included in effective income.

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

4-23

2. Income, Continued

p. Alimony,

Child Support,

and

Maintenance

Payments

See “ECOA Considerations” in this section.

Verify the income if the applicant wants it to be considered. The payments

must be likely to continue in order to include them in effective income.

Factors used to determine whether the payments will continue include, but are

not limited to:

 whether the payments are received pursuant to a written agreement or court

decree,

 the length of time the payments have been received,

 the regularity of receipt, and

 the availability of procedures to compel payment.

q. Automobile

or Similar

Allowances

Generally, automobile allowances are paid to cover specific expenses related

to an applicant’s employment, and it is appropriate to use such income to

offset a corresponding car payment.

However, in some instances, such an allowance may exceed the car payment.

With proper documentation, income from a car allowance which exceeds the

car payment can be counted as effective income. Likewise, any other similar

type of allowance which exceeds the specific expenses involved may be

added to gross income to the extent it is documented to exceed the actual

expense.

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

4-24

2. Income, Continued

r. Other Types

of Income

If it is reasonable to conclude that other types of income will continue in the

foreseeable future, include it in effective income. Otherwise, consider

whether it is reasonable to use the income to offset obligations of 10 to 24

months duration.

“Other” types of income which may be considered as effective income

include, but are not limited to:

 pension or other retirement benefits,

 disability income,

 dividends from stocks,

 interest from bonds, savings accounts, and so on, and

 royalties.

The lender may include verified income from public assistance programs in

effective income if evidence indicates it will probably continue for 3 years or

more.

The lender may include verified workers’ compensation income that will

continue in the foreseeable future, if the veteran chooses to reveal it.

The lender may include verified income received specifically for the care of

any foster child(ren). Generally, foster care income is to be used only to

balance the expenses of caring for the foster child(ren) against any increased

residual income requirements.

Do not include temporary income items such as VA educational allowances

and unemployment compensation in effective income.

Exception:

If unemployment compensation is a regular part of the applicant’s income due

to the nature of his or her employment (for example, seasonal work), it may

be included.

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

4-25

3. Income Taxes and Other Deductions from Income

Change Date

April 10, 2009, Change 10

 This section has been updated to make minor grammatical edits.

a. Income Tax

and Social

Security

Deductions

Determine the appropriate deductions for Federal income tax and Social

Security using the “Employer’s Tax Guide,” Circular E, issued by the Internal

Revenue Service.

Determine the appropriate deductions for state and local taxes using similar

materials provided by the states.

The lender may consider the applicant’s potential tax benefits from obtaining

the loan (for example, mortgage interest deduction) in the analysis. To do so:

 determine what the applicant’s withholding allowances will be, using the

instructions and worksheet portion of IRS Form W-4, Employee’s

Withholding Allowance Certificate, and

 apply that withholding number when calculating Federal and state income

tax deductions.

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

4-26

3. Income Taxes and Other Deductions from Income, Continued

b. Income Tax

Credits from

Mortgage

Credit

Certificates

Mortgage Credit Certificates (MCCs) issued by state and local governments

may qualify a borrower for a Federal tax credit. The Federal tax credit is

based on a certain percentage of the borrower’s mortgage interest payment.

Lenders must provide a copy of the MCC to VA with the loan package which

indicates:

 the percentage to be used to calculate the tax credit, and

 the amount of the certified indebtedness. The certified indebtedness can be

comprised of a loan incurred by the veteran to acquire a principal residence

or a qualified home improvement or rehabilitation loan.

If the percentage on the MCC is more than 20 percent, there is an annual limit

on the tax credit equal to the lesser of $2,000 or the borrower’s maximum tax

liability. Calculate the tax credit by applying the specified percentage to the

interest paid on the certified indebtedness. Then, apply the annual limit.

Example: The MCC shows a 30-percent rate and $100,000 certified

indebtedness. The borrower will pay approximately $8,000 in annual

mortgage interest. Borrower’s estimated total Federal income tax liability is

$9,000. Calculate the tax credit as follows:

 30 percent of $8,000 = $2,400

 Apply the annual $2,000 limit

 The tax credit will be $2,000

 Use $167 (one-twelfth of $2,000) in the monthly analysis

Note: If the mortgage on which the borrower pays interest is greater than the

amount of certified indebtedness, limit the interest used in the tax credit

calculation to that portion attributable to the certified indebtedness.

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

4-27

4. Assets

Change date

April 10, 2009, Change 10

 This section has been updated to correct hyperlinks and make minor

grammatical edits.

a. Amount of

Cash Required

The applicant or spouse must have sufficient cash to cover:

 any closing costs or points which are the applicant’s responsibility and are

not financed in the loan,

 the downpayment, if a GPM, and

 the difference between the sales price and the loan amount, if the sales price

exceeds the reasonable value established by VA.

VA does not require the applicant to have additional cash to cover a certain

number of mortgage payments, unplanned expenses, or other contingencies.

However, 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.

b. Verification

Requirement

Verify all liquid assets owned by the applicant or spouse to the extent they are

needed to close the loan. In addition, verify any liquid assets that may have a

bearing on the overall credit analysis; that is, significant assets.

 Use VA Form 26-8497a, Request for Verification of Deposit, as

appropriate, OR

 original or certified true copies of the applicant’s last two bank statements,

 the borrower’s bank statements available to them by Internet or Faxed from

the depository directly to the lender. In cases where the lending institution

uses Internet based verifications, ensure the URL appears on the document.

Verifications must be no more than 120 days old (180 days for new

construction).

For automatically closed loans, this means the date of the deposit verification

is within 120 days of the date the note is signed (180 days for new

construction).

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

4-28

4. Assets, Continued

b. Verification

Requirement

(continued)

For prior approval loans, this means the date of the deposit verification is

within 120 days of the date the application is received by VA (180 days for

new construction).

c. Pending Sale

of Real Estate

In some cases, the determination that the income and/or assets of a veteran are

sufficient to qualify for the loan depends upon the consummation of the sale

of presently owned real property.

Sales proceeds may be necessary to make a downpayment or pay closing

costs on the VA loan.

In addition, the lender may want to consider the amount of equity the

applicant has accumulated in the property and the extent to which that equity

is attributable to the applicant’s investment rather than the housing market, in

evaluating the applicant’s ability to manage assets.

The lender may consider any downpayment or costs on the VA loan as

provided for by the sale of the property if available information provides a

reasonable basis for concluding the equity to be realized from the sale will be

sufficient for this purpose.

References:

 See section 4 of chapter 5 for prior approval loans which depend upon the

sale of property for the borrower to qualify.

 See section 6 of chapter 5 for required loan closing documents.

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

4-29

5. Debts and Obligations

Change Date

April 10, 2009, Change 10

 This section has been updated to correct hyperlinks and make minor

grammatical edits.

a. Verification

Significant debts and obligations of the applicant must be verified and rated.

Obtain a credit report.

Reference: See section 7 of this chapter for details on the type of credit

report required.

For obligations not included on the credit report which are revealed on the

application or through other means, the lender must obtain a verification of

deposit showing the obligation or other written verification directly from the

creditor. The lender must also separately verify accounts listed as “will rate

by mail only” or “need written authorization.”

When a pay stub or LES statement indicates an allotment, the lender must

investigate the nature of the allotment to determine whether the allotment is

related to a debt.

For obligations that have not been rated on the credit report or elsewhere,

obtain the verification and rating directly from the creditor. Include a written

explanation for any obligation that is not rated.

Resolve all discrepancies. If the credit report or deposit verification reveals

significant debts or obligations which were not divulged by the applicant:

 obtain clarification as to the status of such debts from the applicant, then

 verify any remaining discrepancies with the creditor.

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

4-30

5. Debts and Obligations, Continued

a. Verification

(continued)

Credit reports and verifications must be no more than 120 days old (180 days

for new construction).

For automatically closed loans, this means the date of the credit report or

verification is within 120 days of the date the note is signed (180 days for

new construction).

For prior approval loans, this means the date of the credit report or

verification is within 120 days of the date the application is received by VA

(180 days for new construction).

ECOA prohibits requests for, or consideration of, credit information on a

spouse who will not be contractually obligated on the loan except:

 if the applicant is relying on alimony, child support, or maintenance

payments from the spouse (or former spouse), or

 in community property states.

-If the property is located in a community property state, VA requires

consideration of the spouse’s credit information (whether or not the

spouse will be personally liable on the note and whether or not the

applicant and spouse choose to have the spouse’s income

considered).

b. Verification

of Alimony and

Child Support

Obligations

The payment amount on any alimony and/or child support obligation of the

applicant must be verified.

Do not request documentation of an applicant’s divorce unless it is necessary

to verify the amount of any alimony or child support liability indicated by the

applicant. If, however, in the routine course of processing the loan, the lender

encounters direct evidence (such as, in the credit report) that a child support

or alimony obligation exists, make any inquiries necessary to resolve

discrepancies and obtain the appropriate verification.

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

4-31

5. Debts and Obligations, Continued

c. Analysis of

Debts and

Obligations

Deduct significant debts and obligations from total effective income when

determining ability to meet the mortgage payments. Significant debts and

obligations include:

 debts and obligations with a remaining term of 10 months or more; that is,

long-term obligations, and

 accounts with a term less than 10 months that require payments so large as

to cause a severe impact on the family’s resources for any period of time.

Example: Monthly payments of $300 on an auto loan with a remaining

balance of $1,500, even though it should be paid out in 5 months, would be

considered significant. The payment amount is so large as to cause a severe

impact on the family’s resources during the first, most critical, months of the

home loan.

Determine whether debts and obligations which do not fit the description of

“significant” should be given any weight in the analysis. They may have an

impact on the applicant’s ability to provide for family living expenses.

If a married veteran wants to obtain the loan in his or her name only, the

veteran may do so without regard to the spouse’s debts and obligations in a

non-community property state. However, in community property states, the

spouse’s debts and obligations must be considered even if the veteran wishes

to obtain the loan in his or her name only.

Debts assigned to an ex-spouse by a divorce decree will not generally be

charged against a veteran-borrower. This includes debts that are now

delinquent.

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

4-32

5. Debts and Obligations, Continued

d. Applicant as

Co-obligor on

Another’s Loan

The applicant may have a contingent liability based on co-signing a loan. If:

 there is evidence that the loan payments are being made by someone else,

and

 there is no reason to believe that the applicant will have to participate in

repayment of the loan, then

 the lender may exclude the loan payments from the monthly obligations

factored into the net effective income calculation in the loan analysis.

e. Pending Sale

of Real Estate

In some cases, the determination that the income and/or assets of a veteran are

sufficient to qualify for the loan depends upon the consummation of the sale

of presently owned real property. Sales proceeds may be necessary to:

 clear the outstanding mortgage(s) against the property,

 pay off outstanding consumer obligations, and/or

 make a downpayment or pay closing costs on the VA loan.

Alternatively, the veteran may intend to sell the property with the buyer

assuming the outstanding mortgage obligation.

The lender may disregard the payments on the outstanding mortgage(s) and

any consumer obligations which the veteran intends to clear if available

information provides a reasonable basis for concluding the equity to be

realized from the sale will be sufficient for this purpose.

References:

See section 4 of chapter 5 for prior approval loans dependent upon the sale of

property for the borrower to qualify.

See section 6 of chapter 5 for required loan closing documents.

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

4-33

5. Debts and Obligations, Continued

f. Secondary

Borrowing

If the applicant plans to obtain a second mortgage simultaneously with the

VA-guaranteed loan include the second mortgage payment as a significant

debt.

Reference: See section 4 of chapter 9 for VA limitations on secondary

borrowing.

From an underwriting standpoint, the veteran must not be placed in a

substantially worse position than if the entire amount borrowed had been

guaranteed by VA.

g. Deferred

Student Loan

Payments

If student loan repayments are scheduled to begin within 12 months of the

date of VA loan closing, lenders should consider the anticipated monthly

obligation in the loan analysis. If the borrower is able to provide evidence

that the debt may be deferred for a period outside that timeframe, the debt

need not be considered in the analysis.

h. Loans

Secured By

Deposited

Funds

Certain types of loans secured against deposited funds (signature loans, cash

value life insurance policies, 401K loans, etc…) in which repayment may be

obtained through extinguishing the asset, do not require repayment

consideration for loan qualification.

Note: Assets securing these loans may not be included as an asset in the loan

analysis.

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

4-34

6. Required Search for and Treatment of Debts Owed to the

Federal Government

Change Date

April 10, 2009, Change 10

 Subsection d has been updated to note the elimination of the telephone

method of accessing CAIVRS.

 This section has been updated to correct hyperlinks and make minor

grammatical edits.

a. The Search

Requirement

There are two separate procedures the lender must follow. Both should be

initiated immediately upon receipt of a loan application to avoid delays in

closing the loan.

(1) Ask the veteran and any veteran co-obligors (including spouse if a

veteran) if he or she:

- is receiving VA disability benefits,

- would be entitled to receive VA disability benefits, but for the receipt of

retired pay,

- has received VA disability benefits in the past, or

- is an unmarried surviving spouse of a veteran who died on active duty or

as a result of a service-connected disability.

If the veteran falls under one of the above categories, follow the procedures

discussed under subsection b “Debt Related to VA Benefits” of this section.

(2) For all applicants and co-obligors (veteran or nonveteran) on all VA loans

including IRRRLs, perform a CAIVRS inquiry.

Reference: See “CAIVRS Procedures” in this section.

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

4-35

6. Required Search for and Treatment of Debts Owed to the

Federal Government, Continued

b. Debt Related

to VA Benefits

Before processing a loan involving certain veterans, as described in section

a (1) “The Search Requirement,” the lender must submit VA Form 26-8937,

Verification of VA Benefits, to the VA office where the loan application

and/or closed loan package will be sent. VA will complete and return the

form to the lender.

The loan cannot be submitted for prior approval or approved under the

automatic procedure until the lender obtains the completed form from VA.

The lender must maintain the completed form with the loan package.

If the form indicates that the applicant receives a nonservice-connected

pension or has been rated incompetent by VA, the loan cannot be closed

automatically. Submit the loan for prior approval.

If the form indicates that the applicant has any of the following:

 an outstanding indebtedness of overpaid education, compensation, or

pension benefits,

 an education or direct home loan in default,

 an outstanding indebtedness resulting from payment of a claim on a prior

guaranteed home loan,

 a repayment plan for any of these debts that is not current, then one of the

following must accompany the loan package:

- evidence of payment in full of the debt, or

- evidence of a current repayment plan acceptable to VA and evidence that

the veteran executed a promissory note for the entire debt balance.

Note: No promissory note is required in cases referred to the Department of

Justice, Government Accountability Office, or VA Regional Counsel for

judicial enforcement. In such cases, VA will obtain information on the

applicant’s debt status from these parties and relay pertinent information to

the lender.

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

4-36

6. Required Search for and Treatment of Debts Owed to the

Federal Government, Continued

b. Debt Related

to VA Benefits

(continued)

VA may find a repayment plan acceptable if:

 the veteran has been satisfactorily making payments on a repayment plan in

effect prior to the lender’s inquiry,

 the veteran’s overall credit history and anticipated financial capacity after

the proposed loan is made indicate a reasonable likelihood that the

repayment plan will be honored and the outstanding amount of indebtedness

is not so large that it would prevent payment in full, within a reasonable

period (approximately 1 year), or

 the case involves unusually meritorious circumstances.

Example:

Consideration would be given to a veteran with an outstanding credit history

and adequate income whose debt balance is too large to be reasonably paid

out in less than 18 months to 2 years.

VA will offer special consideration to a veteran’s claim that he or she was not

previously aware of an overpayment of benefits.

c. What is

CAIVRS?

CAIVRS is a Department of Housing and Urban Development (HUD)

maintained computer information system which enables participating lenders

to learn when an applicant has previously defaulted on a federally-assisted

loan. The system’s interactive voice response function provides instant credit

information.

The database includes default information from the Department of

Agriculture, Department of Education, Department of Justice, HUD, Small

Business Administration, Federal Deposit Insurance Corporation, and VA.

The VA default information included in the database relates to:

 overpayments on education cases,

 overpayments on disability benefits income, and

 claims paid due to home loan foreclosures.

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

4-37

6. Required Search for and Treatment of Debts Owed to the

Federal Government, Continued

d. CAIVRS

Procedures

VA assigns an 11-digit VA lender identification number (ID) to each new

lender (See section 12 of chapter 1), then automatically forwards the ID

number to HUD with a request to grant the lender CAIVRS access. The

lender can begin accessing CAIVRS usually between 1 week and 10 business

days after receiving its VA ID number assignment.

Lenders must perform a CAIVRS screening on all obligors on the loan

(including IRRRL loans). The one exception to this policy is that CAIVRS is

not required for non-purchasing spouses in community property states.

On October 1, 2008, HUD discontinued all telephone access to CAIVRS. As

of that date, lenders must obtain CAIVRS information via the Internet.

Internet Access for Federal Housing Administration (FHA) Approved

Lenders

FHA-approved lenders who are currently accessing CAIVRS via telephone

and who have FHA Connection User IDs, should request that their FHA

Connection Application Coordinator update their FHA Connection profile to

include CAIVRS. FHA approved lenders who do not have FHA Connection

User IDs, should access the FHA connection at

https://entp.hud.gov/clas/index.cfm, and select Registering a New User to

request a User ID and access to CAIVRS.

Internet Access for Non-FHA Participating Lenders

Non-FHA participating lenders who are currently accessing CAIVRS via the

telephone should request online access from

http://www.hud.gov/offices/hsg/sfh/sys/caivrs/caivrs.cfm, select the Using

CAIVRS option. Once at the site, select Registration for Lender User ID from

the main menu and complete all fields. Select Veterans’ Affairs for the

Agency field and enter the first 10 digits of your VA Lender ID. Each non-

FHA participating lender must request at least one Application Coordinator

ID as well as a Standard User ID for each individual user.

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

4-38

6. Required Search for and Treatment of Debts Owed to the

Federal Government, Continued

d. CAIVRS

Procedures

(continued)

Please direct questions concerning problems encountered with online registration

or access to the HUD Resource Center at 1-800-CALL-FHA (1-800-225-5342).

Once screening is complete, enter the CAIVRS confirmation code on VA Form

26-6393, Loan Analysis, in the space to the right of the “no” block in item 46.

For IRRRLs, enter the code on VA Form 26-8923, IRRRL Worksheet, beside

the word “Note” located near the bottom of the form.

e. Applicant

Presently

Delinquent

Give full consideration to the CAIVRS information, and any subsequent

clarifying information provided, in applying VA credit standards.

 Consider the terms of any repayment plan in analyzing monthly debt

payments.

 Consider any delinquencies in determining creditworthiness.

CAIVRS information is only for the lender’s and applicant’s use in

processing the loan application. Only those persons having responsibility for

screening applicants and/or co-obligors may use CAIVRS. Any other use is

unauthorized.

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

4-39

6. Required Search for and Treatment of Debts Owed to the

Federal Government, Continued

e. Applicant

Presently

Delinquent

(continued)

If the CAIVRS screening indicates an applicant (or co-obligor) is presently

delinquent or has had a foreclosure or a claim paid on a loan made,

guaranteed, or insured by a Federal agency, take the following actions:

Step

Action

Suspend processing of the loan application.

Contact the applicant or co-obligor for information regarding the

loan default, foreclosure, or claim.

If a previous VA loan is involved, the applicant may call

1-800-827-0648 to make arrangements to repay the debt.

Contact the Federal agency that reported the applicant to CAIVRS

if further information is needed.

Use the phone number provided by CAIVRS (Step 7 in the

previous table).

f. Treatment of

Federal Debts

An applicant cannot be considered a satisfactory credit risk if he or she is

presently delinquent or in default on any debt to the Federal Government until

the delinquent account has been brought current or satisfactory arrangements

have been made between the applicant and the Federal agency. The

refinancing of a delinquent VA loan with an IRRRL satisfies this

requirement.

An applicant cannot be considered a satisfactory credit risk if he or she has a

judgment lien against his or her property for a debt owed to the Government

until the judgment is paid or otherwise satisfied.

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

4-40

7. Credit History

Change Date

April 10, 2009, Change 10

 This section has been updated to make minor grammatical edits.

a. Credit

Report

Standards

Credit reports used in analyzing VA loans must be either:

 Three-file Merged Credit Reports (MCR), or

 Residential Mortgage Credit Reports (RMCR).

The credit report must be less than 120 days old (180 days for new

construction).

For automatically closed loans, the date of the credit report must be within

120 days of the date the note is signed (180 days for new construction).

For prior approval loans, the date of the credit report must be within 120 days

of the date the application is received by VA (180 days for new construction).

If an RMCR is Used

The standards applicable to an RMCR include, but are not limited to, the

following:

 The report must be prepared by a reputable credit reporting agency.

 Each account with a balance must have been checked with the creditor

within 90 days of the date of the credit report.

 For each debt listed, the report must provide the creditor’s name, date the

account was opened, high credit, current status, required payment, unpaid

balance, and payment history.

 The report must name at least two national repositories of credit records

contacted for each location in which the borrower has resided during the

most recent 2 years (separate repository inquiries are required for any co-

borrowers with individual credit records).

 The report must include all available public records information that is not

considered obsolete under the Fair Credit Reporting Act; such as

bankruptcies, judgments, law suits, foreclosures and tax liens.

 The RMCR must be an original report, with no erasures, whiteouts, or

alterations.

 The report must contain a 24-month employment and residency history.

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

4-41

7. Credit History, Continued

a. Credit

Report

Standards

(continued)

VA may decline to accept a credit report which does not meet these standards.

VA will notify the lender and the credit reporting agency of how quality

standards are not being met. If the problem continues, VA will inform all

participating lenders that credit reports from the particular credit reporting

agency are unacceptable.

All inquiries made within the last 90 days must be included on the report.

b. Verification

and Rating of

Debts and

Obligations

See section 5 of this chapter for requirements of verification.

c. How to

Analyze Credit

The applicant’s past repayment practices on obligations are the best indicator

of his or her willingness to repay future obligations. Emphasis should be on

the applicant’s overall payment patterns rather than isolated occurrences of

unsatisfactory repayment. Determine whether the applicant (and spouse, if

applicable) is a satisfactory credit risk based on a careful analysis of the credit

report and other credit data.

Rent and Mortgage Payment History

The applicant’s rental history and any outstanding, assumed, or recently

retired mortgages must be verified and rated.

Housing expense payment history is often the best indicator of how motivated

the applicant is to make timely mortgage payments in the future.

Absence of Credit History

For applicants with no established credit history, base the determination on

the applicant’s payment record on utilities, rent, automobile insurance, or

other expenses that applicant has paid.

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

4-42

7. Credit History, Continued

c. How to

Analyze Credit

(continued)

Absence of a credit history is not generally considered an adverse factor. It

may result when:

 recently discharged veterans have not yet developed a credit history,

 applicants have routinely used cash rather than credit, and/or

 applicants have not used credit since some disruptive credit event such as

bankruptcy or debt pro-ration through consumer credit counseling. In these

cases, develop evidence of timely payment of noninstallment obligations

such as rent and utilities since the disruptive credit event.

Reference: For bankruptcy cases, see “Bankruptcy” in this section.

Accounts in the Spouse’s Name

Under ECOA - Upon the applicant’s request, the lender must consider any

account reported in the name of the applicant’s spouse or former spouse that

the applicant can demonstrate accurately reflects the applicant’s

creditworthiness.

Consideration of the Spouse’s Credit History

ECOA prohibits requests for, or consideration of, the credit of a spouse who

will not be contractually obligated on the loan except:

 if the applicant is relying on alimony, child support, or maintenance

payments from the spouse (or former spouse), or

 in community property states.

- If the property is located in a community property state, VA requires

consideration of the spouse’s credit (whether or not the spouse will be

personally liable on the note and whether or not the applicant and spouse

choose to have the spouse’s income considered).

- If a married veteran wants to obtain the loan in his or her name only, the

veteran may do so without regard to the spouse’s credit only in a non-

community property state.

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

4-43

7. Credit History, Continued

c. How to

Analyze Credit

(continued)

Adverse Data

Reestablished Credit: In circumstances not involving bankruptcy, satisfactory

credit is generally considered to be reestablished after the veteran, or veteran

and spouse, have made satisfactory payments for 12 months after the date the

last derogatory credit item was satisfied. For example, assume a credit report

reveals several unpaid collections, including some which have been

outstanding for many years. Once the borrower has satisfied the obligations,

and then makes timely payments on subsequent obligations for at least 12

months, satisfactory credit is reestablished.

Collections: Isolated collection accounts do not necessarily have to be paid

off as a condition for loan approval. For example, a credit report may show

numerous satisfactory accounts and one or two unpaid medical (or other)

collections. In such instances, while it would be preferable to have

collections paid, it would not necessarily be a requirement for loan approval.

However, collection accounts must be considered part of the borrower’s

overall credit history and unpaid collection accounts should be considered

open, recent credit. Borrowers with a history of collection accounts should

have reestablished satisfactory credit (see previous paragraph) in order to be

considered a satisfactory credit risk.

Disputed Accounts: Lenders may consider a veteran's claim of bona fide or

legal defenses regarding unpaid debts except when the debt has been reduced

to judgment. Account balances reduced to 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 these

debts after the acceptability of applicant's credit is questioned does not alter

the unsatisfactory record of payment.

Summary: The above guidance is not meant to address every possible

scenario. Lenders should carefully review the complete credit history and use

their judgment. For example, if an applicant has numerous unpaid collections

– no matter when they were established – it’s not unreasonable to question the

borrower’s ability and willingness to honor obligations. If the applicant

and/or spouse are determined satisfactory credit risks in spite of derogatory

credit information, the loan file should include an explanation from the

applicant(s) and the lender’s underwriter of the basis for the determination. If

lenders are unsure about a particular situation, they should contact the

appropriate VA Regional Loan Center.

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

4-44

7. Credit History, Continued

d. Consumer

Credit

Counseling

Plan

If a veteran, or veteran and spouse, have prior adverse credit and are

participating in a Consumer Credit Counseling plan, they may be determined

to be a satisfactory credit risk if they demonstrate 12 months’ satisfactory

payments and the counseling agency approves the new credit.

If a veteran, or veteran and spouse, have good prior credit and are

participating in a Consumer Credit Counseling plan, such participation is to

be considered a neutral factor, or even a positive factor, in determining

creditworthiness. Do not treat this as a negative credit item if the veteran

entered the Consumer Credit Counseling plan before reaching the point of

having bad credit.

e. Bankruptcy

The fact that a bankruptcy exists in an applicant’s (or spouse’s) credit history

does not in itself disqualify the loan. Develop complete information on the

facts and circumstances of the bankruptcy. Consider the reasons for the

bankruptcy and the type of bankruptcy filing.

Bankruptcy Filed Under the Straight Liquidation and Discharge Provisions

of the Bankruptcy Law

You may disregard a bankruptcy discharged more than 2 years ago.

If the bankruptcy was discharged within the last 1 to 2 years, it is probably

not possible to determine that the applicant or spouse is a satisfactory credit

risk unless both of the following requirements are met:

 the applicant or spouse has obtained consumer items on credit subsequent to

the bankruptcy and has satisfactorily made the payments over a continued

period, and

 the bankruptcy was caused by circumstances beyond the control of the

applicant or spouse such as unemployment, prolonged strikes, medical bills

not covered by insurance, and so on, and the circumstances are verified.

Divorce is not generally viewed as beyond the control of the borrower

and/or spouse.

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

4-45

7. Credit History, Continued

e. Bankruptcy

(continued)

If the bankruptcy was caused by failure of the business of a self-employed

applicant, it may be possible to determine that the applicant is a satisfactory

credit risk if

- the applicant obtained a permanent position after the business failed,

- there is no derogatory credit information prior to self-employment,

- there is no derogatory credit information subsequent to the bankruptcy,

and

- failure of the business was not due to the applicant’s misconduct.

If a borrower or spouse has been discharged in bankruptcy within the past 12

months, it will not generally be possible to determine that the borrower or

spouse is a satisfactory credit risk.

Petition Under Chapter 13 of the Bankruptcy Code

This type of filing indicates an effort to pay creditors. Regular payments are

made to a court-appointed trustee over a 2 to 3 year period or, in some cases,

up to 5 years, to pay off scaled down or entire debts.

If the applicant has finished making all payments satisfactorily, the lender

may conclude that the applicant has reestablished satisfactory credit.

If the applicant has satisfactorily made at least 12 months worth of the

payments and the Trustee or the Bankruptcy Judge approves of the new

credit, the lender may give favorable consideration.

f. Foreclosures

The fact that a home loan foreclosure (or deed-in-lieu of foreclosure) exists in

an applicant’s (or spouse’s) credit history does not in itself disqualify the loan.

 Develop complete information on the facts and circumstances of the

foreclosure.

 Apply the guidelines provided for bankruptcies filed under the straight

liquidation and discharge provisions of the bankruptcy law. See the

preceding heading entitled “Bankruptcy.”

If the foreclosure was on a VA loan, the applicant may not have full

entitlement available for the new loan. Ensure that the applicant’s Certificate

of Eligibility reflects sufficient entitlement to meet any secondary marketing

requirements of the lender.

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

4-46

8. Documentation for Automated Underwriting Cases

Change Date

April 10, 2009, Change 10

 Subsection b has been updated by removing the requirement for a separate

certification on Automated Underwriting cases receiving an “Accept” or

“Approve.”

 This section has been updated to make minor grammatical edits.

a. General

VA has approved Freddie Mac’s Loan Prospector, Fannie Mae’s Desktop

Underwriter, pmiAura System for VA, CLUES (for loans originated by

Countrywide), Zippy (for loans originated by Chase), Automated

Underwriting Systems (AUS) for use in connection with VA-guaranteed

home loans. These systems incorporate VA’s credit standards and processing

requirements.

Lenders may use certain reduced documentation requirements on cases

processed with approved AUS. The level of reduced documentation depends

on the risk classification assigned. The systems use slightly different

terminology such as Approve or Accept. The tables in this section give a

general description of documentation waivers. Please note that the

documentation requirements are the same for these cases as for non-AUS

cases, except for any differences cited in the tables.

Data Integrity

It is imperative that the data entered into the automated underwriting system

be accurately verified. The data utilized by the system must be supported by

source documentation obtained by the lender. Inaccurate or unverified data

will result in invalidation of the risk classification. Under certain

circumstances, it could also result in a finding of material misrepresentation,

which could affect the validity of the guaranty.

Underwriter’s

Certification

Because the AUS will be making the determination that the loan satisfies

credit and income requirements, cases receiving an “Accept” or “Approve”

rating will not require the underwriter’s certification on VA Form 26-6393,

Loan Analysis (items 49 through 53).

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

4-47

8. Documentation for Automated Underwriting Cases,

Continued

Documentation

Guidelines For

Credit History

Refer to the following table for Documentation guidelines for credit history.

Subject and

Reference

Documentation Classification

Documentation Guidelines and

Reductions for Refer

Additional Documentation

Reductions for Accept/Approve

Types of credit

reports used in

reconciliation

(section 7 of

this chapter)

Use any of the following if <120 days

old:

 All in-file reports,

 Selected in-file reports,

 Merged credit report, or

 RMCR.

Same as Refer.

Explanation of

discrepancies in

reported debt

(section 5 of

this chapter)

No explanation is required.

Same as Refer.

Rental payment

history (section

7 of this

chapter)

Provide a 12 month rental history

directly from landlord, through

information shown on credit report or

by cancelled checks.

No verification of rent is required.

Verification of

significant

nonmortgage

debt (section 5

of this chapter)

Obtain direct verification for

significant debts not reported on the

credit report.

Note: Significant means that the debt

has a monthly payment exceeding 2

percent of the stable monthly income

for all borrowers.

Same as Refer.

Note: Perform manual downgrade to

Refer if direct verification reveals

more than 1 by 30 day late payment in

the past 12 months for any of the

omitted debts.

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

4-48

8. Documentation for Automated Underwriting Cases,

Continued

c. Documentation Guidelines For Credit History (continued)

Subject and

Reference

Documentation Classification

Documentation Guidelines and

Reductions for Refer

Additional Documentation

Reductions for Accept/Approve

Mortgage

payment

history (section

7 of this

chapter)

Obtain direct verification when ratings

are not available on mortgages that are

any of the following:

 outstanding,

 assumed, or

 recently retired.

A written explanation of mortgage

payment history is required for

borrowers with more than 1 by 30 day

late payment for all mortgages for the

past 12 months.

Perform manual downgrade to Refer

for any mortgage debt with more than

1 by 30 day late payment in the past

12 months.

Account

balances

(section 7 of

this chapter)

If a mortgage or other significant debt

is listed on the credit report as past due

and was last updated >90 days, verify

current status of past due debt.

Same as Refer, however if rating is

currently >90 days past due, manually

downgrade to REFER.

Derogatory

credit

information

(section 7 of

this chapter)

Obtain explanation for derogatory

credit. Explain assessment of

creditworthiness on VA Form 26-6393,

Loan Analysis.

No determination of ratios or credit

worthiness is required.

Alimony and/or

child support

payments

(section 2 of

this chapter)

Provide the following:

 proof of deposits on bank statements

for 3 months, and

 front page and details of support

payments from the divorce decree,

indicating evidence of at least 3 years

continuance.

Same as Refer.

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

4-49

8. Documentation for Automated Underwriting Cases,

Continued

d. Documentation

Guidelines for

Borrowers-Not

Self Employed

Refer to the following table for documentation guidelines for

employment/income for borrowers who are not self-employed.

Subject and

Reference

Documentation Classification

Documentation Guidelines and

Reductions for Refer

Additional Documentation

Reductions for Accept/Approve

Employment

gaps (section 2

of this chapter)

No explanation for employment gaps is

required if the gaps are <30 days.

No explanation for employment gaps

is required if gaps are <60 days.

Verifying

current

employment

for borrowers

who are not

self-employed

(section 2 of

this chapter)

Document telephone contact verifying

borrower’s current employer.

Use pay stubs covering at least 1 full

month of employment and contains the

following:

 year-to-date (YTD) information,

 bonus information, and

 overtime information.

Same as Refer.

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

4-50

8. Documentation for Automated Underwriting Cases,

Continued

d. Documentation Guidelines for Borrowers-Not Self Employed (continued)

Subject and

Reference

Documentation Classification

Documentation Guidelines and

Reductions for Refer

Additional Documentation

Reductions for Accept/Approve

Verifying

employment

(section 2 of

this chapter)

Use a VOE or any of the following,

covering the 2-year period prior to

closing:

 W-2 Forms, or

 Income information obtained from

the IRS via one of the following

forms:

- Form 8821, Tax Information

Authorization, (or alternate form

acceptable to the IRS that collects

comparable information) or

- Form 4506, Request for Copy of

Tax Return, (or alternate form

acceptable to the IRS that collects

comparable information).

No VOE is required if the borrower

has been with the same employer for

1 year and W-2 Forms for 1 previous

year have been collected.

No W-2 Forms are required for a

borrower on active duty.

No W-2 Forms are required if all of

the following are met:

- Borrower with same employer

>2 years

- Employer phone contact verifies

the length of employment and

current status (still employed)

- Borrower not self-employed or

commissioned

- Bonus, overtime, or secondary

income not needed to qualify

- Stable monthly income to be

determined by using current

base pay only (rather than total

earnings)

- Borrower signs one of the

following for the previous 2 tax

years:

- Form 8821, and

- Form 4506.

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

4-51

8. Documentation for Automated Underwriting Cases,

Continued

e. Documentation

Guidelines for

Borrowers-Self

Employed

Refer to the following table for documentation guidelines for

employment/income for borrowers who are self-employed.

Subject and

Reference

Documentation Classification

Documentation Guidelines and

Reductions for Refer

Additional Documentation

Reductions for Accept/Approve

Individual tax

returns for

self-employed

borrowers

(section 2 of

this chapter)

Provide one of the following, with all

line items captured:

 signed copies of individual tax

returns for the most recent 2-year

period, or

 individual income information

obtained from the IRS via one of the

following forms:

- Form 8821 (or an alternate form

acceptable to the IRS that collects

comparable information) or

- Form 4506 (or an alternate form

acceptable to the IRS that collects

comparable information).

Same as Refer.

Balance sheets

and profit and

loss statements

for self-

employed

borrowers

(section 2 of

this chapter)

No balance sheet or YTD Profit and

Loss (YTD P&L) is required if

origination date is < 7 months from the

business’ fiscal year end (for which tax

returns or information from the IRS via

Form 8821 or Form 4506 were

provided).

No balance sheet or YTD P&L is

required.

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

4-52

8. Documentation for Automated Underwriting Cases,

Continued

e. Documentation Guidelines for Borrowers-Self Employed (continued)

Subject and

Reference

Documentation Classification

Documentation Guidelines and

Reductions for Refer

Additional Documentation

Reductions for Accept/Approve

Business tax

returns for

self-employed

borrowers

(section 2 of

this chapter)

Provide one of the following, with all

line items captured:

 Signed copies of business tax returns

for the most recent 2- year period.

 Business income information

obtained from the IRS via one of the

following forms:

- Form 8821 (or an alternate form

acceptable to the IRS that collects

comparable information) or

- Form 4506 (or an alternate form

acceptable to the IRS that collects

comparable information).

No business tax returns are required

if all of the following conditions are

met:

 Borrower proves ownership of the

business for at least the past 5

years.

 Individual tax returns reflect

consistent income for the past 2

years.

 Funds for downpayment or closing

costs are not from the business.

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

4-53

8. Documentation for Automated Underwriting Cases,

Continued

f. Documentation

Guidelines for

Assets

Refer to the following table for documentation guidelines for assets.

Subject and

Reference

Documentation Classification

Documentation Guidelines and

Reductions for Refer

Additional Documentation

Reductions for Accept/Approve

Verify closing

costs (section

4 subsection a

of this chapter)

Verify veteran’s source of funds for

payment of any difference between

sales price and loan amount plus

closing costs, if the sales price exceeds

reasonable value established by the

Notice of Value (NOV).

No verification of veteran’s source

of funds is required if closing costs

plus the difference between the sales

price of the property and the base

loan amount is <4 percent of the

lesser of the following:

 sales price, or

 reasonable value established by an

NOV.

Verify assets

to close in the

applicant’s

name (section

4 of this

chapter)

Provide original bank statements or

certified true copies covering the most

recent 2-month period in lieu of a

Verification of Deposit (VOD).

Provide original bank statements or

certified true copies covering most

recent 1-month period in lieu of a

VOD.

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

4-54

9. How to Complete VA Form 26-6393, Loan Analysis

Change Date

April 10, 2009, Change 10

 This section has been updated to make minor grammatical edits.

a. General

In order to properly enter information on VA Form 26-6393, Loan Analysis,

the underwriter must understand and apply the guidelines provided in the

preceding sections of this chapter.

Self-explanatory items are not discussed in this section.

b. Estimated

Monthly

Shelter

Expenses

Special instructions are listed in the following table.

Item

Special Instructions

If taxes are expected to increase, use the increased amount.

Include the flood insurance premium for properties located in

special flood hazard areas.

If special assessments are anticipated, use the anticipated amount.

Calculate maintenance and utility costs using 14¢ per square foot.

Example: A 1500 square foot home would have a combined

maintenance and utility cost of $210 (1500sq X .14).

For condominiums or houses in a Planned Unit Development

(PUD), include the monthly amount of maintenance assessment

payable to the homeowner’s association.

If the assessment is less than the maximum provided in the

covenants or master deed and it appears likely that the assessment

will be insufficient for operation of the condominium or PUD,

include the maximum amount the veteran could be charged.

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

4-55

9. How to Complete VA Form 26-6393, Loan Analysis,

Continued

c. Debts and

Obligations

List all known debts and obligations of the applicant and spouse including

any alimony and/or child support payments.

Place a check mark in the () column next to any “significant” debt or

obligation. See the topic “Analysis of Debts and Obligations” in section 5 of

this chapter, for an explanation of “significant.”

Job Related Expense

Include any costs for child care, significant commuting costs, and any other

direct or incidental costs associated with the applicant’s (or spouse’s)

employment. Check this item if total job-related expenses are significant.

d. Item 33,

Federal Income

Tax

Enter the applicant’s estimated monthly Federal income tax. If the applicant

has a MCC, reduce the Federal income tax by the estimated tax credit.

Reference: See the topic “Income Tax Credits from Mortgage Credit

Certificates” in section 3 of this chapter.

e. Item 44,

Balance

Available for

Family Support

Enter the appropriate residual income amount from the following tables in the

“guideline” box. Residual income is the amount of net income remaining

(after deduction of debts and obligations and monthly shelter expenses) to

cover family living expenses such as food, health care, clothing, and gasoline.

The numbers are based on data supplied in the Consumer Expenditures

Survey (CES) published by the Department of Labor’s Bureau of Labor

Statistics. They vary according to loan size, family size, and region of the

country.

Special Instructions for Using Tables

Count all members of the household (without regard to the nature of the

relationship) when determining “family size,” including:

 an applicant’s spouse who is not joining in title or on the note, and

 any other individuals who depend on the applicant for support. For

example, children from a spouse’s prior marriage who are not the

applicant’s legal dependents.

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

4-56

9. How to Complete VA Form 26-6393, Loan Analysis,

Continued

e. Item 44,

Balance

Available for

Family Support

(continued)

Special Instructions for Using Tables (continued)

Exception: The lender may omit any individuals from “family size” who are

fully supported from a source of verified income which, for whatever reason,

is not included in effective income in the loan analysis. 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.

Reduce the residual income figure (from the following tables) by a minimum

of five percent if:

 the applicant or spouse is an active-duty or retired serviceperson, and

 there is a clear indication that he or she will continue to receive the benefits

resulting from use of military-based facilities located near the property.

Use five percent unless the VA office of jurisdiction has established a higher

percentage, in which case, apply the specified percentage for that jurisdiction.

A key to the geographic regions is listed in the following tables.

Table of Residual Incomes by Region

For loan amounts of $79,999 and below

Family

Size

Northeast

Midwest

South

West

$390

$382

$425

$654

$641

$713

$788

$772

$859

$888

$868

$967

$921

$902

$1,004

over 5

Add $75 for each additional member up to a family of seven.

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

4-57

9. How to Complete VA Form 26-6393, Loan Analysis,

Continued

e. Item 44, Balance Available for Family Support (continued)

Table of Residual Incomes by Region

For loan amounts of $80,000 and above

Family

Size

Northeast

Midwest

South

West

$450

$441

$491

$755

$738

$823

$909

$889

$990

$1,025

$1,003

$1,117

$1062

$1,039

$1,158

over 5

Add $80 for each additional member up to a family of seven

Key to Geographic Regions Used in the Preceding Tables

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

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

4-58

9. How to Complete VA Form 26-6393, Loan Analysis,

Continued

f. Item 45,

Debt-to-Income

Ratio

VA’s debt-to-income ratio is a ratio of total monthly debt payments (housing

expense, installment debts, and other debt) to gross monthly income.

Add: Items 15 + 16 + 17 + 18 +20 +40 = Debt

Add: Items 31 + 38* = Income

Divide: Debt  Income = Debt-to-Income Ratio

Round: To the nearest two digits

The “Debt-to-Income Ratio” heading in section 10 of this chapter contains

special procedures to apply if the ratio exceeds 41 percent.

*Tax-free income may be “grossed up” for purposes of calculating the debt-

to-income ratio only (not residual income). This is a tool that may be used to

lower the debt ratio for veterans who clearly qualify for the loan. “Grossing

up” involves adjusting the income upward to a pre-tax or gross income

amount which, after deducting state and Federal income taxes, equals the tax-

exempt income. Use current income tax withholding tables to determine an

amount which can be prudently employed to adjust the borrower’s actual

income. Do not add non-taxable income to taxable income before “grossing

up.”

Tax-free income includes certain military allowances, child support

payments, workers’ compensation benefits, disability retirement payments,

and certain types of public assistance payments. Verify that the income is

indeed tax-free before “grossing up.”

If “grossing up” is used, indicate such and provide the “grossed up” ratio in

item 47, “Remarks.”

g. Item 46, Past

Credit Record

Indicate whether the applicant (and spouse, if applicable) is a satisfactory or

unsatisfactory credit risk based on a complete analysis of credit data.

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

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10. How to Analyze the Information on VA Form 26-6393

Change Date

April 10, 2009, Change 10

 This section has been updated to make minor grammatical edits.

a. Residual

Income

VA’s minimum residual incomes (balance available for family support) are a

guide. They should not automatically trigger approval or rejection of a loan.

Instead, consider residual income in conjunction with all other credit factors.

An obviously inadequate residual income alone can be a basis for

disapproving a loan.

If residual income is marginal, look to other indicators such as the applicant’s

credit history, and in particular, whether and how the applicant has previously

handled similar housing expense.

Consider whether the purchase price of the property may affect family

expense levels. For example, a family purchasing in a higher priced

neighborhood may feel a need to incur higher-than-average expenses to

support a lifestyle comparable to that in their environment, whereas a

substantially lower priced home purchase may not compel such expenditures.

Also consider the ages of the applicant’s dependents in determining the

adequacy of residual income.

Continued on next page

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Chapter 4: Credit Underwriting

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10. How to Analyze the Information on VA Form 26-6393,

Continued

b. Debt-to-

Income Ratio

VA’s debt-to-income ratio is a ratio of total monthly debt payments (housing

expense, installment debts, and so on) to gross monthly income. It is a guide

and, as an underwriting factor, it is secondary to the residual income. It

should not automatically trigger approval or rejection of a loan. Instead,

consider the ratio in conjunction with all other credit factors.

A ratio greater than 41 percent requires close scrutiny unless:

 the ratio is greater than 41 percent solely due to the existence of tax-free

income (Put notation regarding the tax-free income in the loan file or

calculate an adjusted, smaller ratio based on “grossing up” of the tax-free

income.), or

 residual income exceeds the guideline by at least 20 percent.

Loans Closed Automatically with Ratio Greater than 41 percent

Include a statement justifying the reasons for approval, signed by the

underwriter’s supervisor, unless residual income exceeds the guideline by at

least 20 percent. The statement must:

 not be perfunctory, or

 list the compensating factors justifying approval of the loan.

c. Credit

History

A poor credit history alone is a basis for disapproving a loan.

If credit history is marginal, look to other indicators such as residual income.

Continued on next page

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Chapter 4: Credit Underwriting

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10. How to Analyze the Information on VA Form 26-6393,

Continued

Compensating

Factors

Compensating factors may affect the loan decision. These factors are

especially important when reviewing loans which are marginal with respect to

residual income or debt-to-income ratio. They cannot be used to compensate

for unsatisfactory credit.

Valid compensating factors should represent unusual strengths rather than

mere satisfaction of basic program requirements. For example, the fact that

an applicant has sufficient assets for closing purposes, or meets the residual

income guideline, is not a compensating factor.

Valid compensating factors should logically be able to compensate (to some

extent) for the identified weakness in the loan. For example, significant

liquid assets may compensate for a residual income shortfall whereas long-

term employment would not.

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

 excellent credit history,

 conservative use of consumer credit,

 minimal consumer debt,

 long-term employment,

 significant liquid assets,

 sizable downpayment,

 the existence of equity in refinancing loans,

 little or no increase in shelter expense,

 military benefits,

 satisfactory homeownership experience,

 high residual income,

 low debt-to-income ratio,

 tax credits for child care, and

 tax benefits of home ownership.

Continued on next page

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Chapter 4: Credit Underwriting

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10. How to Analyze the Information on VA Form 26-6393,

Continued

e. Compare

What Shelter

Expenses will

be to What

Applicant Pays

Now

Closely scrutinize a case in which the applicant will be paying significantly

higher shelter expenses than he or she currently pays. Consider the:

 ability of the applicant and spouse to accumulate liquid assets; such as cash

and bonds, and

 amount of debts incurred while paying a lesser amount for shelter.

If an application shows little or no capital reserves and excessive obligations,

it may not be reasonable to conclude that a substantial increase in shelter

expenses can be absorbed.

VA Pamphlet 26-7, Revised

Chapter 4: Credit Underwriting

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11. Examples of Underwriting Deficiencies

Change Date

April 10, 2009, Change 10

 This section has been updated to make minor grammatical edits.

a. Purpose

Because of the high loan-to-value ratios of VA-guaranteed loans, it is critical

that underwriters use sound judgment. The underwriting deficiencies listed in

this section represent a sample of actual deficiencies found on VA loans that

went into default. The deficiencies were of such significance that many of the

loans should not have been made.

b. Inadequate

Development of

Credit

Information

Deficiencies included:

 failing to compare documented information with the applicant’s initial

application,

 failing to question and investigate obvious discrepancies

- in the number of dependents or household size, and

- between actual year-to-date average monthly earnings and the income

claimed on the loan application,

 failing to question multiple Social Security numbers for an applicant,

 failing to determine future plans of an active-duty serviceperson whose

separation from service is imminent, and

 accepting an explanation for a bad credit history without documenting the

circumstances alleged to have caused the credit problem, judgment, or

bankruptcy.

c. Missing

Documentation

Deficiencies included failure:

 to inquire about and document the payment history on previous home loans,

including prior VA loans, and

 to obtain documentation of employment history during the previous 2 years.

Continued on next page

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11. Examples of Underwriting Deficiencies, Continued

d. Verification

and Procedural

Errors

Deficiencies included:

 requiring the veteran to sign partially completed or blank forms,

 permitting income or asset deposit information to be hand carried by the

applicant, real estate/sales agent, or a party other than the lender’s

specifically-designated employee,

 addressing verification forms to an individual chosen by the applicant rather

than to the employer’s personnel or payroll department, and

 obtaining multiple/revised credit reports without validating the need for the

subsequent reports.

e. Income

Analysis Errors

Deficiencies included:

 showing that an applicant is a salaried employee when, in fact, the applicant

works solely on a commission basis, is a contract employee, or is actually

self-employed,

 failing to use net profit or net income from Schedule C of Internal Revenue

Service Form 1040 rather than the gross income of an applicant who is self-

employed

 using short-term, temporary, or sporadic income to qualify an applicant for

a loan, and

 qualifying a marginal applicant for a loan by using a buydown or GPM

without establishing that the applicant’s income will keep pace with the

scheduled increase in mortgage payments. This is especially important in

times of low inflation and stagnant or declining real estate markets.

Examples of unreliable income sources include:

 overtime pay in an industry or area that is experiencing an economic

slowdown or decline,

 income from a second job even though the applicant does not have a record

of steadily working two jobs,

 rental income even though the applicant does not have verified experience

as a landlord, and

 poorly documented income from self-employment.

Continued on next page

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Chapter 4: Credit Underwriting

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11. Examples of Underwriting Deficiencies, Continued

f. Other

Analysis Errors

Deficiencies included:

 Filing to consider

- changes in marital status or household size after application and prior to

closing, and

- pay statements showing deductions to creditors that are not shown on the

application, credit reports, or deposit verifications.

 Approving a loan solely on the basis of an emotional appeal from the

applicant or spouse, the sales agent, seller, or other interested party.

Note: A decision or an inclination to reject a loan application should not be

changed unless there is new and compelling information available to justify

approving the loan.

 Approving high debt-to-income ratio loans with few or no valid

compensating factors.

 Using gift letters to offset past due obligations, pay off debts, and so on,

without consideration of the credit risk implications of the past due

obligations.

 Ignoring debts, judgments, bankruptcies, alimony or child support

obligations because they don’t appear on the credit report.

 Failing to reconcile a large increase in shelter expense with an

undemonstrated ability to accumulate cash assets.