Debts and Obligations

• All significant debts and obligations of the applicant(s) must be verified and rated.
• The lender must obtain a credit report.

Credit reports used in analyzing VA loans must be either:

• Three file Merged Credit Reports (MCR), OR
• Residential Mortgage Credit Reports (RMCR).

• 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).

What If Debts And Obligations Listed On The Loan Application Do Not Appear On The Credit Report?

(Lender’s Handbook, Chapter 4, Topic 5a)

For obligations not included on the credit report, which are revealed on the application or through other means, you must obtain a verification of deposit showing the obligation or other written verification directly from the creditor.

• You must also separately verify accounts listed as “will rate by mail only” or “need written authorization.”
• When a pay stub or leave and earnings statement indicates an allotment being withheld, you must investigate the nature of the allotment to determine whether the allotment is related to a debt.

What If There Are Discrepancies Found On The Credit Report?

(Lender’s Handbook, Chapter 4, Topic 5a)

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.

Equal Credit Opportunity Act (ECOA)

(Lender’s Handbook, Chapter 4, Topic 5a)

The Equal Credit Opportunity Act (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
• 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 the spouse’s income is considered).

How Can The Lender Verify Alimony And Child Support Obligations?

(Lender’s Handbook, Chapter 4, Topic 5b)

• The payment amount on any alimony and/or child support obligation of the applicant(s) must be verified. This can usually be verified in the divorce decree. Payment often is noted on applicant’s pay stub.
• Do not request documentation of 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 (e.g., in the credit report) that a child support or alimony obligation exists, make any inquiries necessary to resolve discrepancies and obtain the appropriate verification.

ANALYSIS OF DEBTS AND OBLIGATIONS

(Lender’s Handbook, Chapter 4, Topic 5c)

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, 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.

What If A Married Veteran Wants To Obtain The Loan In His Or Her Name Only?

(Lender’s Handbook, Chapter 4, Topic 5c)

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. Also, if debts are assigned to an ex-spouse by a divorce decree, they will not be charged against a veteran borrower. This includes debts that are now delinquent. The spouse must still be counted as a family member for residual income purposes unless income to exclude the spouse is documented. See Information Bulletin 2007-05 on the Houston RLC website for more information on loans in community property states.

APPLICANT AS CO-OBLIGOR ON ANOTHER’S LOAN

(Lender’s Handbook, Chapter 4, Topic 5d)

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, the lender may exclude the loan payments from the monthly obligations factored into the net effective income calculation in the loan analysis.

Example: Applicant cosigned for his daughter’s car; however, she is making the payments. Request copies of canceled checks. Likewise, if payments are being deducted from her pay, obtain copies of pay stubs. Compare the amount of deduction with the amount of the payment reflected on the credit report.

PENDING SALE OF REAL ESTATE

(Lender’s Handbook, Chapter 4, Topic 5e)

Sale proceeds from the applicant’s current home may be necessary to:

• Pay off the outstanding mortgage or other obligations.
• Make a down payment.
• Pay closing costs.

Obtain a copy of the sales contract and any applicable information that provides a reasonable basis for concluding the equity that will be realized from the sale will be sufficient. Verification that the sale has closed should be obtained as part of the lender’s file documentation.

SECONDARY BORROWING

(Lender’s Handbook, Chapter 4, Topic 5f)

If the applicant plans to obtain a second mortgage simultaneously with the VA-guaranteed loan then the second mortgage payment must be included as a significant debt. The terms of the second mortgage payment should not place the veteran in a substantially worse position than if the entire amount borrowed had been guaranteed by VA. The veteran may not borrow the difference when the sales price exceeds the reasonable value of the property.