Top 5 Underwriting Problems with VA Mortgages:
The VA mortgage is an incredible benefit to our veterans and surviving spouses: No down payment, low rates, no monthly mortgage insurance, and more flexible underwriting. That last feature can also be tricky for lenders who are not familiar with some of the features of the VA loan guidelines that differ slightly from other loan types:
ETS Date: This has to be the most common pitfall. Because active duty military members have contracts with an end date, active duty pay can not be used as qualifying income for a mortgage if that date on the LES is less than 12 months away unless the borrower certifies they intend to re-enlist and their command confirms in writing that they are eligible to do so or certain other exceptions. You can check your LES- it is box number 6 on this example.
Residual Income: VA mortgages allow higher debt to income ratios than other mortgage types, because underwriting is based primarily off residual income, where the amount left over after all expenses are paid is compared to the guideline minimum figures for a given area and family size. Unlike other mortgages which only look at debt, the residual income calculation also requires factoring in tax withholding, expected maintenance and utility cost for the new home, and child care.
Rental Income: if you are turning the home you are leaving into a rental property, 75% of the monthly rent may be used to offset the payment on that property, but unlike other mortgage types, no income may be considered in qualifying. For properties that are already used as rentals, income that is included on the tax return can be used, but the borrower must have cash reserves of 3x the monthly payment.
Property Condition: VA loans get a bad rap for overly stringent property condition requirements, but there are some common issues- no peeling exterior paint or rotten wood is allowed (check around windows, underneath the edge of the roof, and on exterior stairs and railings) and stairs must have hand railings. These are considered protections since peeling paint and rotting wood can lead to structural damage and, well, hand railings keep you from falling down stairs. For properties on a well, the VA requires water to be tested to the local health authority’s requirements and the water sample must be collected by a disinterested third party, so the realtor can not collect the water sample. Regardless of the real estate contract, if a property is located in the very heavy or moderate to heavy regions of the termite infestation probability map, the property must have a pest inspection:
BAH for a borrower with orders for PCS: Since your ability to repay the loan is determined from the income you will have going forward, your qualifying BAH is based off your new duty station, not your old one. A skilled VA lender will use the Lookup Tool to ensure they are using the correct amount. If your PCS is from Coronado to Norfolk, this is a big income difference that must be taken into consideration!
