VA Credit Underwriting Changes Matrix June 2018 Topic Prior Guidance New Guidance Assets and Amount of Cash Required for Closing Sec 4.

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1 Assets and Amount of Cash Required for Closing Sec 4.04 Assets Gift Funds Sec 4.04 Assets Pending Sale of Real Estate Sec 4.04 Automated Underwriting (AUS) Prior Approval Loans Sec 4.08 Automated Underwriting (AUS) Rental Payment History for Refer Cases Sec 4.08 Credit History Charged Off Accounts Credit History Collection Account UW Explanation Requirement Credit History Cost of Credit Report Credit History Deed-in-Lieu or Short Sale Provide a 12-month rental history directly from landlord, through information shown on credit report or by cancelled checks. New topic. Guidance is not new. Gifts acceptable from a donor with no affiliation with the builder, developer, real estate agent, or any other interested party to the transaction Acceptable documentation includes: o Evidence of the borrower s deposit, or o A copy of the donor s funds by check/electronic transfer to closing agent, or o The CD showing receipt of donor s funds New topic to recognize the proceeds as an asset. AUS does NOT apply to prior approval loans and they must be manually underwritten. Provide a 24-month rental history directly from landlord, through information shown on credit report or by cancelled checks. The underwriter must address the circumstances regarding the negative credit history when reviewing the overall credit. While VA does not require that collection accounts be paidoff prior to closing if overall credit is acceptable, an underwriter must address the collection account(s) with an explanation on VA Form , Loan Analysis. Cost of credit report must be listed on report or lender must use itemized invoice to verify cost on the CD. If the borrower s payment history before the short sale or DIL was satisfactory, a waiting period from the date of transfer of the property may not be necessary. 1

2 Credit History Foreclosure, Deed-in- Lieu, or Short Sale in Conjunction with a Bankruptcy Credit History Judgment Payment History Debts and Obligations Treatment of Alimony and Child Support Debts and Obligations Community Property States Debts and Obligations Loan Secured by Deposited Funds Debts and Obligations Open 30-Day Charge Accounts When repayment plan is in place, document history of timely payments Same as new guidance If a foreclosure, deed-in-lieu, or short sale process is in conjunction with a bankruptcy, use the latest date of either the discharge of the bankruptcy or transfer of title for the home to establish the beginning date of re-established credit. In certain cases when a judgment has only been in place for a few months, an underwriter could justify on VA Form , Loan Analysis, a shorter repayment history if the documentation indicates the borrower immediately addressed the judgment after it was filed and began a repayment plan. Spousal support may be treated as a reduction in income on VA Form , Loan Analysis. Child support payment is treated as a liability on VA Form , Loan Analysis. New topic that consolidates guidance Use the current balance times 60% minus loan balance to equal the usable amount to consider as an asset A statement is only necessary to verify the amount used as an asset For open 30-day accounts: Determine if the borrower pays the balance in full each month and has verified funds to cover the balance plus required closing costs. If there are sufficient verified funds, payment does not need to be considered. If insufficient assets, a minimum of 5% of the balance should be considered. 2

3 Debts and Obligations Student Loans Digital Signatures Sec 4.01 Employment Employed Less than 12 Months Employment Expiration Term of Service (ETS) <12 Months Employment Recent History of Frequent Changes Same as new, but only conveyed in Circular Has not been added to Handbook yet. Lender may utilize the income if the borrower has been employed at least 12 months, to partially offset debts of 10 to 24 months duration Significant cash reserves can be positive underwriting factor No detail on Officer ETS 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. If a student loan is in repayment or scheduled to begin within 12 months of closing, the lender MUST consider the anticipated monthly payment and utilize the payment established by: Calculating each loan at a rate of 5% of the outstanding balance divided by 12 months. If the payment(s) reported on the credit report is less than the threshold payment calculation (above)the lender must use the payment on the credit report. If the payment reported on the credit report is less than the threshold payment calculation (above), to count the lower payment, the file must contain a statement from the student loan servicer reflecting actual terms and payment for each loan: o Statement must be dated within 60 days of loan closing o Lender s discretion regarding credit supplementation Digital signatures are acceptable. Lender may utilize the income if the borrower has been employed at least 12 months, to partially offset debts of 6 to 24 months duration. 6 months PITI, cash can be positive underwriting factor. Officers with ETS date of or are not subject to special documentation unless there is evidence Officer has resigned commission. Topic removed 3

4 Employment Offer Letter Employment Verification Documentation VA Credit Underwriting Changes Matrix Employment Verification Services Income Alimony, Child Support Income Automobile Allowance and 2106 Expenses Income Boarder Income Commissions Income LES The payments must be likely to continue in order to include them in effective income. Same as new, but only conveyed in Circular Has not been added to Handbook yet. Can be original or certified copy 4 Offer letters that begin after closing are acceptable and pay stubs may not be available VOE and Pay Stubs Date Automatically closed loans within 120 days of closing (180 for new construction) Prior Approval Loans within 120 days from date application is received by VA (180 for new construction) Also added that VOE must be original document or electronic copy. Employment Verification Services are acceptable Current paystub is NOT required with automated verification service Fee may NOT be charged Verify the income if the borrower wants it considered. The payments must be likely to continue for at least 3 years from the anticipated closing date. Auto expense on 2106 may need to be deducted from allowance. Negative amount is treated as debt. Allowed Requires 2 years of tax returns documenting income Rental area cannot exceed 25% of total floor area No reserves necessary and all income can be used Commission income <25% of total income 2106 expenses are not deducted even if reported Commission income >25% of total income 2106 expenses are deducted Auto lease and loan payments are treated as recurring debt. Not subtracted from income. Can be original, electronic or certified copy.

5 Income Other Military Allowances Income Other Types Income OT, Part Time, Second Jobs, Bonuses Income Rental If the duration of the military allowance cannot be determined, this source of income may still be used to offset short-term obligations of 10 to 24 months duration. If income will not be received for 3 years, it may be used to offset short-term obligations of 10 to 24 months duration. Foster income allowed as effective income. May use this income, if not eligible for inclusion in income, but verified for at least 12 months, to offset debts of 10 to 24 months duration. If the borrower has multiple properties, the borrower must have 3 months PITI documented to consider the rental income. If the duration of the military allowance cannot be determined, this source of income may still be used to offset short-term obligations of 6 to 24 months duration. If income will not be received for 3 years it may be used to offset short-term obligations of 6 to 24 months duration. Foster income cannot be used as effective income. VA Pension income must be discussed with VA Pension Dept or VA Hospital to determine future continuity. Income from foreign contracts acceptable. May use this income, if not eligible for inclusion in income, but verified for at least 12 months, to offset debts of 6 to 24 months duration. If the borrower has multiple properties, the borrower must have 3 months PITI documented for each property to consider the rental income. If no lien on the rental property(ies), 3 months reserves to cover expenses (taxes, hazard/flood insurance, HOA or other recurring fees must be documented. Equity in the property CANNOT be used as reserves. Cash proceeds from a VA refinance CANNOT be counted as required reserves. Gift funds CANNOT be used to meet reserve requirements. If rental income will not or cannot be used, the full mortgage payment should be considered and reserves NOT required. On multi-unit property securing loan if each unit is separate and not under one mortgage, 6 months PITI required for each unit. 5

6 Income Reserves or National Guard (RNG) Income Self-Employment Income Analysis Income VA Disability Income Taxes and Other Deductions Sec 4.03 Non-Purchasing Spouse (NPS) RNG income not likely to continue >12 months may be used to offset obligations of 10 to 24 months duration. Same as new RNG income not likely to continue >12 months may be used to offset obligations of 6 to 24 months duration. Financial statements, including a year-to-date P & L and Balance Sheet, MUST be completed after one-half of the tax year has passed. Business or rollover losses must be considered from all tax returns. Joint tax return: Business loss must be deducted from borrower s income in both community and noncommunity property states. VA disability income does not need continuance documentation. VA disability income may not be shown on the COE in certain instances (examples are given). Lenders should follow new documentation guidelines for Veterans where disability income is not shown on COE. (multiple steps provided). VA disability may be verified via bank statement. Income tax deduction should be based on IRS publications and not solely on paystub. Use state listed on LES for state tax deduction, not subject property state. For dependents up to age 12, the lender is responsible for determining if there are any childcare expenses for the borrower. New topic consolidating existing guidance 6

7 VA Form Dependents Listed on Tax Return Sec 4.09 VA Form Gross Up Percentage for Non-Taxable Income Sec 4.09 Use current income tax withholding tables to determine an amount that can be prudently employed to adjust the borrower s actual income. If a dependent is claimed on the Federal Tax Returns, then the dependent must be considered as a member of the household to calculate residual income. Use a figure of 125% of the borrower s non-taxable income when grossing up. 7