Underwriting VA Loans

(Lender's Handbook, Chapter 4)

INCOME VERIFICATION

• Verify a minimum of two years of employment (including previous jobs, if needed).
• Only verified income can be considered in qualifying for a VA loan.
• Income of a spouse who will be obligated on the loan must also be verified, if needed.

Acceptable verification of employment consists of the following:

• VA Form 26-8497, Request for Verification Of Employment (VOE), or any format that obtains the same information.
• All Verifications of Employment must be originals. Note: It is acceptable for Department of Defense civilian employees to provide computer generated pay stubs accessed through E/MSS (Employee Member Self Service).
• An original or certified copy of the applicant’s pay stub, when furnished by the employer, must be provided.
• The employment verification should be compared with the pay stub for consistency.

Note: The VOE and pay stub must not be more than 120 days old (180 days for new construction) for loans closed on the automatic basis.

ALTERNATIVE DOCUMENTATION

(Lender’s Handbook, Chapter 4)

• Telephone verifications should be obtained and be similar in content to the employment verification form. Phone verification should show the person contacted, their position, phone number, and date contacted.
• Furnish the original pay stub(s) covering the most recent 30-day period together with W-2 forms for the previous 2 years.
• Two verification companies, VIE and TALX Corporation, have been approved for use on VA loans.

Note: If documents are questionable in authenticity or consistency, or if the employer is unwilling to provide a verbal verification, then a standard verification of employment is required.

ADDITIONAL SOURCES OF INCOME

(Lender’s Handbook, Chapter 4, Topics 2p,q,r)

• Receipt of child support, alimony, or separate maintenance must be disclosed and verified to be considered when qualifying for the loan.
• In accordance with the Equal Credit Opportunity Act (ECOA), do not ask questions about the income of a spouse unless the spouse will be contractually liable or the applicant is relying on the spouse’s income to qualify.
• In community property states, information concerning a non-purchasing spouse may be requested and considered in the same manner as for the applicant, even if the spouse will not be contractually obligated on the loan.
• Generally, income from a 2nd job should only be used after the applicant has 24 months experience of working two jobs.
• Generally, income from overtime or part-time work is not considered reliable unless the applicant has received this income for 2 years.
• Overtime and part-time earnings that have been received for at least 1 year can be used to off-set intermediate term debts with less than 24 months remaining.
• Seasonal income may be used under special circumstances. It is important to document the past history and the likelihood it will continue.
• Income from Worker’s Compensation, Foster Care, Public Assistance, Social Security, Alimony, and Child Support may be considered if they have been verified as consistently paid and are likely to continue. Public assistance programs and Social Security must continue for a minimum of 3 years from the date of closing to be counted.

Note: Temporary income such as VA educational allowances and unemployment compensation do not represent stable and reliable income and as a general rule, are not to be considered as income.

INCOME FROM SELF-EMPLOYMENT

(Lender’s Handbook, Chapter 4, Topic 2j)

Generally, income from self-employment may be used when the applicant has been selfemployed for at least 2 years.

• Copies of the past two years’ business or individual tax returns must be provided.
• The current year-to-date profit & loss statement, and balance sheets are required. These exhibits can be prepared by the business or the veteran, if adequate information is provided.
• Normal business expenses that can be “added-back” to the net profit or bottom-line figures include depreciation, business interest, and amortization of organizational fees (corporations).
• Business debts listing the name of a Sole Proprietor on a Schedule C must be counted against the veteran on the loan analysis. The same applies to partnerships filed on IRS Form 1065. Only corporate debts are exempt from the veteran’s loan analysis.
• For partnerships and corporations, furnish a list of the primary owners and their percentage in the business. This can usually be found on the K-1 Forms for partnership and subchapter S corporations, or on the 1120 Form, Schedule E for standard corporations.
• Taxable Income listed on the bottom of a corporate tax return (IRS Form 1120) may be divided by the veteran’s percentage of ownership and then used as additional income (subject to tax).

INCOME FROM COMMISSIONS

(Lender’s Handbook, Chapter 4, Topic 2i)

When all or a major portion of an applicant’s income is from commissions, a verification exhibit is needed. It must show the year-to-date commissions, the basis for computing commissions, and how frequently commissions are paid to the applicant.

• Commission income can be considered stable after the applicant has received it for two years.
• The prior two years' income tax returns must be provided with W-2s and 1099-MISC Forms. These individual returns must be complete with all schedules, signatures and dates included.

RENTAL INCOME

(Lender’s Handbook, Chapter 4, Topic 2o)

Rental of an existing present residence is generally used to off-set the mortgage payment if there is a positive cash flow. A copy of the lease should be furnished. The debt should still be listed on the loan analysis, but shown as a “rental offset.”

Rental Income from Property To Be Secured by VA Loan

• If the veteran is purchasing multi-family housing, the lender should obtain (1) documentation (education, prior experience, professional management contract, etc) supporting the likelihood of the veteran’s success as a landlord, (2) copies of leases (if available), and (3) evidence of cash reserves equaling 6 months of mortgage payments.
• 75 percent of the anticipated rental income can be considered as qualifying income. All of the conditions must be met to include rental income as qualifying income.

ACTIVE MILITARY INCOME VERIFICATION

(Lender’s Handbook, Chapter 4, Topic 2k)

• An original or certified copy of the applicant's Leave and Earnings Statement (LES) is required. Note: The Department of Defense provides service members access to a computer generated LES through the E/MSS (Employee Member Self Service). This type of LES is acceptable.
• Service members who are within 12 months of release from active duty or the end of their contract term require additional information. Note: The ETS (Expiration of Term of Service)or EAOS(Expiration of Active Obligated Service) date can be found on the LES for enlisted personnel or on an officer’s orders.
• If release will be within 12 months of the anticipated closing date, one of the following is required:
• Evidence that the applicant has already re-enlisted or extended his or her period of active duty to a date 12 months beyond the date of loan closing, OR
• Verification of a valid offer of local civilian employment, OR
• A statement from the service member that he/she intends to reenlist or extend his or her active duty to a date beyond the 12-month period. PLUS
• A statement from the applicant’s commanding officer confirming that the applicant is eligible to reenlist or extend his or her active duty and has no reason to believe that such reenlistment or extension of active duty will not be granted.

Note: Continuation of Military Allowances (flight pay, hazardous duty pay, etc.) must be determined to count as income. If continuation cannot be determined, these allowances may be used to offset short term debts (24 months or less).

Can Employment of Less Than 12 Months Be Considered As Qualifying Income?

(VA Lender’s Handbook, Chapter 4, Topic 2)

Generally, employment of less than 12 months’ duration is not considered stable and reliable. However, it may be considered stable and reliable if the individual facts warrant such a conclusion. Carefully consider:

• The employer’s evaluation of the probability of continued employment (If provided).
• Whether the applicant’s training and/or education equipped him or her with particular skills, which relate directly to the duties of his or her current position. Examples include nurse, medical technician, lawyer, paralegal, and computer systems analyst.

Note: If the probability of continued employment is high based on these factors, then the lender may give favorable consideration to including the income in total effective income.