Home buyers planning to use the VA loan program tend to have a lot of questions about the VA mortgage underwriting process And it’s easy to understand why. Much of it happens without the borrower’s direct involvement, making it something of a “mystery.”
Even so, home buyers who use VA loans should have a basic understanding of the mortgage underwriting process. Because there might come a time when they need to take certain steps to help the underwriter complete the process.
What Is Mortgage Underwriting, Exactly?
Mortgage underwriting represents the final review of a borrower’s loan application and supporting documents.
The review process starts earlier, shortly after the borrower applies for a home loan or gets pre-approved. But the most intensive review occurs during the mortgage underwriting stage, which takes place before the final closing.
Mortgage lenders who offer VA loans typically use an “Automated Underwriting System,” or AUS. This is a computer software system that evaluates a borrower’s eligibility for a VA loan, based on a variety of criteria. Many of these criteria come from the Department of Veterans Affairs.
Automated underwriting systems used for VA loans offer many advantages, when compared to the manual process. Among other things, they can streamline and expedite the VA mortgage underwriting process, to help the borrower reach the final closing stage in a timely manner.
Many borrowers can obtain approval through the automated underwriting system. But those who have had credit issues in the past might require a secondary “manual underwrite.” This involves a closer and more stringent review of the loan file.
Events that could require manual underwriting for a VA loan include late or missed mortgage payments in the past, defaults on federal debt, and previous bankruptcies or foreclosures.
What Do VA Loan Underwriters Look for?
VA mortgage underwriters review all aspects of the loan file to make sure the lender is making a good investment. In a typical lending scenario, the mortgage lender puts more money into the deal than the borrower does. So they want to make sure they are making a sound investment.
To determine this, lender’s underwriter will review the property being purchased as well as the buyer’s credentials. They also have to make sure that the loan meets all requirements set forth by the Department of Veterans Affairs, which manages the VA home loan program.
So, what does the underwriter actually do during VA mortgage underwriting?
The process can vary from one underwriter to the next, since they all have different methods and workflows. But in general, the underwriter will perform most or all of the following steps:
- Review the borrower’s credit history and credit score.
- Examine the borrower’s income documentation to verify its accuracy.
- Analyze the borrower’s debt-to-income ratio to assess their financial stability.
- Validate the property’s appraisal to ensure its value aligns with the loan amount.
- Verify the source of the borrower’s down payment and closing costs.
- Check the borrower’s employment history and stability.
- Ensure compliance with lending guidelines and regulations.
- Calculate the loan-to-value ratio based on the appraisal and loan amount.
- Assess the borrower’s financial reserves to cover potential expenses.
- Double-check all documentation and calculations for accuracy.
Based on this thorough review process, the VA loan underwriter will typically issue one of three decisions. These decisions represent the three possible outcomes that follow the VA mortgage underwriting process:
1. Loan Approval
If the underwriter reviews all documentation and determines that the borrower meets the lender’s criteria, he or she will issue an approval. This decision is based on factors like the borrower’s creditworthiness, income, debt-to-income ratio, and the property’s appraisal.
An approval means that the borrower is qualified to receive the requested mortgage amount and can therefore move on to the closing process.
2. Loan Denial
If an underwriter denies a loan application, it means the borrower does not meet the necessary criteria for loan approval. This can occur for various reasons, such as a low credit score, insufficient income, a high debt-to-income ratio, or problems with the property’s appraisal.
The lender will typically provide an explanation for the denial so that the borrower can take steps to address those issues and reapply in the future.
3. Request for Additional Information
Sometimes, an underwriter may not immediately approve or deny a loan application. Instead, they may request additional information or documentation from the borrower to clarify certain aspects of their financial situation.
This is sometimes referred to as a “conditional approval.” It means that the loan can still be approved if the borrower resolves the outstanding issues or conditions. This might include more detailed income verification, explanations for certain financial discrepancies, or additional documents related to the property.
How You Can Help Keep the Process on Track
As you can see, a lot of the VA loan mortgage underwriting process happens “behind closed doors,” without direct involvement from the home buyer. But there are also times when the buyer can help facilitate the process to keep it moving forward.
If the mortgage underwriter needs additional information from you, try to handle that request in a timely manner. This will help prevent unwanted delays.
A common example is what’s known as the “letter of explanation.” Sometimes, VA mortgage underwriters require a letter of explanation from the borrower relating to a certain financial transaction, such as a large bank deposit or withdrawal.
The underwriter might also request additional information relating to the borrower’s employment status, income, assets, and other important checkpoints.
During the VA mortgage underwriting process, communication is key. Stay in touch with your mortgage company point of contact, which is typically a loan officer or broker. Make sure they (and the underwriter) have everything they need to complete the process.
Everyone is on the same team here, but the team still needs to work together to get a win!