VA loans are a valuable financial tool for veterans and active-duty service members looking to purchase a home. They come with numerous benefits, including competitive interest rates and the opportunity for zero down payment. While the Department of Veterans Affairs (VA) technically does not set a minimum credit score requirement, a score of 500 or higher is often unofficially honored by most lenders. In this blog, we will delve into the world of VA manual underwriting and how it plays a crucial role in helping individuals with bad credit secure VA loans.
Definition of Manual Underwriting
Manual underwriting is a process employed when an applicant doesn’t meet the standard automated underwriting criteria. In essence, it’s a personalized evaluation of the borrower’s financial situation. Unlike automated systems that rely solely on credit scores, manual underwriting takes a holistic approach to assess an applicant’s creditworthiness.
Requirements for VA Manual Underwriting
For those seeking VA loans through manual underwriting, several key criteria must be met:
- 12 Months Free of Derogatory Credit: To be considered, applicants typically need a clean credit history for at least 12 months, meaning no late payments or defaults.
- 24 Months of Satisfactory Housing History: Lenders prefer applicants who have a solid history of on-time rent or mortgage payments, demonstrating their ability to handle housing-related financial responsibilities.
- Debt-to-Income Ratio Under 50-65 Percent: The debt-to-income (DTI) ratio is a crucial factor. While VA guidelines allow for flexibility, most lenders aim for a DTI ratio under 50-65 percent, depending on individual lender policies.
- Adequate Residual Income: Residual income refers to the money left after paying all major debts and living expenses. It ensures that borrowers have enough financial cushion to comfortably meet their obligations.
- Limited Payment Shock: Payment shock is the increase in housing expenses compared to what the borrower was previously paying. Lenders want to see that borrowers can handle this increase without financial strain.
Importance of Manual Underwriting
Manual underwriting is especially vital for applicants with bad credit. It provides an opportunity for a more in-depth assessment of their financial situation beyond just a credit score. Here’s why it matters:
- Holistic Evaluation: Manual underwriting considers the broader financial context, allowing lenders to understand the reasons behind a low credit score. This can be crucial for veterans facing credit challenges due to life circumstances.
- Second Chance: It offers a lifeline to individuals with bad credit who may have experienced setbacks but are now on a more stable financial path. A comprehensive review can reveal positive aspects of their financial health.
Access to VA Loan Benefits: VA loans are renowned for their favorable terms, and manual underwriting helps applicants with bad credit access these benefits, such as competitive interest rates and no down payment requirements.
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