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A loan is automatically guaranteed by VA upon closing (prior to issuance of the LGC) provided the loan was made by: · a supervised or a non-supervised lender with automatic authority, and · the lender complied with applicable law and regulations. d.
When is a Prior Approval Loan Guaranteed?
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When is a Prior Approval Loan Guaranteed?
A prior approval loan is also guaranteed by VA upon closing (prior to issuance of the LGC) provided: · the closed loan matches the proposed loan upon which the Certificate of Commitment was based, and · the lender complied with applicable law and regulations.
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Continued on next page 3-20 3-20 VA Lenders Handbook 26-7 Chapter 3: The VA Loan and Guaranty Topic 11: What Does a VA Guaranty Mean to the Lender, continued e.
What is Evidence of Guaranty?
Evidence of guaranty is VA Form 26-1899, Loan Guaranty Certificate, which is generated electronically via VA’s webLGY application.
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The LGC represents tangible proof to the lender that VA’s guaranty is given in good faith.
It is contingent upon: · the Veteran, property and purpose of the loan being eligible, · no fraud or material misrepresentation on the part of the lender, and · the lender’s compliance with applicable law and regulations.
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For example, VA may deny or reduce payment on a future claim based on the lender or holder’s noncompliance whether or not VA has issued evidence of guaranty on the loan.
The LGC also has an audit indicator that, if noted Yes, lets the lender know the case has been identified for full review.
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In these instances, the lender then needs to submit a complete loan origination package to the appropriate VA office for review.
Packages should be submitted within 15 days of the LGC being generated. f.
Total Loss of Guaranty Willful fraud or material misrepresentation by the lender or holder, or by an agent of either, will relieve VA of liability for payment of any claim on the loan.
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VA also has no liability in the case of: · forgery on the note, mortgage, loan application, or other loan documents, or · a Certificate of Eligibility or discharge papers that are counterfeited, falsified, or not issued by the Government.
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A holder of a VA loan who acquired the loan without notice or knowledge of fraud or material misrepresentation in procuring the guaranty will not be denied payment of any claim on the loan by reason of such fraud or material misrepresentation.
Continued on next page 3-21 VA Lenders Handbook 26-7 Chapter 3: The VA Loan and Guaranty Topic 11: What Does a VA Guaranty Mean to the Lender, continued g.
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Partial Loss of Guaranty A holder of a VA loan who fails to comply with applicable laws and regulations may receive only partial payment of a claim if VA’s liability increases due to the holder’s noncompliance.
Material misrepresentation which is not willful has the same consequence.
No claim will be paid on such loan until the amount of any increase in VA’s liability is known.
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The burden of proof is on the holder to establish that VA’s increased liability is not due to the holder’s noncompliance or misrepresentation.
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Examples of noncompliance with applicable law and regulations which may lead to an increase in VA’s liability include: · failure to obtain and retain the required lien on property to secure the loan, · failure to include the power to substitute trustees, · failure to procure and maintain insurance coverage, · failure to advise VA as to default, · failure to provide notice of intention to begin
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· failure to provide notice of intention to begin foreclosure action, · failure to provide notice to VA in any suit or action, or notice of sale, · improper release, conveyance, substitution or exchange of security, · lack of legal capacity of a party to the transaction, · failure to assure that escrowed/earmarked funds are expended in accordance with the agreement, and · failure to take into
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with the agreement, and · failure to take into consideration limitations upon the quantum or quality of the estate or property
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. 3-22 VA Lenders Handbook 26-7 Chapter 3: The VA Loan and Guaranty Topic 12: Post-Guaranty Issues Change Date: November 8, 2012 · This section has been changed to include hyperlinks. a.
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Corrections to LGCs LGCs are generated using data entered from several sources, including the VA Funding Fee Payment System (VA FFPS) https://www.ffps.vba.va.gov/.
If a lender discovers an error in reported data, such as date of loan closing, before they have generated the LGC, they must access the VA FFPS system to make the correction.
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This will then result in the correct closing date being shown when the LGC is obtained.
If the error is discovered after the LGC has been generated, lenders will need to contact the appropriate VA RLC for assistance.
An LGC with minor typographical errors that do not compromise accurate identification of the loan is valid. b.
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Replacement of Missing LGC with Duplicate A lender may obtain duplicate LGCs at any time simply by accessing the system and reprinting the LGC. c.
Transfer of Loans It is not necessary to notify VA of the assignment of a guaranteed loan. d.
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Loan Assumptions The assumption of VA-guaranteed loans for which commitments were made on or after March 1, 1988, requires the approval of VA (or certain lenders on VA’s behalf). e.
Paid-in-Full Loans Holders of VA-guaranteed loans are required to electronically report the date the loan was paid-in-full in the VA Loan Electronic Reporting Interface (VALERI) system.
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Lenders are required to report paid-in-full loans to VA upon full satisfaction of the loan by payment or otherwise.
Lenders/servicers are not required to mail LGCs to VA when a loan is terminated.
Since this information will now be reported through VALERI, there is no need to have the actual LGC returned to VA upon termination of the loan.
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Continued on next page 3-23 VA Lenders Handbook 26-7 Chapter 3: The VA Loan and Guaranty Topic 12: Post-Guaranty Issues Change Date: November 8, 2012 · This section has been changed to include hyperlinks. a.
Corrections to LGCs LGCs are generated using data entered from several sources, including the VA Funding Fee Payment System (VA FFPS) https://www.ffps.vba.va.gov/.
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If a lender discovers an error in reported data, such as date of loan closing, before they have generated the LGC, they must access the VA FFPS system to make the correction.
This will then result in the correct closing date being shown when the LGC is obtained.
If the error is discovered after the LGC has been generated, lenders will need to contact the appropriate VA RLC for assistance.
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An LGC with minor typographical errors that do not compromise accurate identification of the loan is valid. b.
Replacement of Missing LGC with Duplicate A lender may obtain duplicate LGCs at any time simply by accessing the system and reprinting the LGC. c.
Transfer of Loans It is not necessary to notify VA of the assignment of a guaranteed loan. d.
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Loan Assumptions The assumption of VA-guaranteed loans for which commitments were made on or after March 1, 1988, requires the approval of VA (or certain lenders on VA’s behalf). e.
Paid-in-Full Loans Holders of VA-guaranteed loans are required to electronically report the date the loan was paid-in-full in the VA Loan Electronic Reporting Interface (VALERI) system.
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Lenders are required to report paid-in-full loans to VA upon full satisfaction of the loan by payment or otherwise.
Lenders/servicers are not required to mail LGCs to VA when a loan is terminated.
Since this information will now be reported through VALERI, there is no need to have the actual LGC returned to VA upon termination of the loan.
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Continued on next page 3-23 VA Lenders Handbook 26-7 Chapter 3: The VA Loan and Guaranty Topic 12: Post-Guaranty Issues, continued f.
Maintenance of Loan Records Lenders must maintain copies of all loan origination records on VA-guaranteed home loans for at least 2 years from the date of loan closing.
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Even if the loan is sold, the original lender must maintain these records (or legible copies) for the required period.
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Loan origination records include: · the loan application (including any preliminary application), · verifications of employment and deposit, · all credit reports (including preliminary credit reports), · copies of each sales contract and addendum, · letters of explanation for adverse credit items, discrepancies and the like, · direct references from creditors, · correspondence with employers, ·
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creditors, · correspondence with employers, · appraisal and compliance inspection reports, · reports on termite and other inspections of the property, · builder change orders, and · all closing papers and documents
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Lenders must make these records accessible to VA personnel conducting audit reviews
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. 3-24 CHAPTER 4: CREDIT UNDERWRITING Overview Topic Title Page 1 General Underwriting Information 4-2 2 Income – Required Documentation and Analysis 4-5 3 Income Taxes and Other Deductions 4-22 4 Assets and Closing Requirements 4-24 5 Debts and Obligations 4-26 6 Debts Owed to the Federal Government 4-31 7 Credit History – Required Documentation and Analysis 4-35 8 Automated Underwriting Cases
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and Analysis 4-35 8 Automated Underwriting Cases (AUS) 4-41 9 How to Complete VA Form 26-6393, Loan Analysis 4-48 10 How to Analyze the Information on VA Form 26-6393, Loan Analysis 4-53 4-1 VA Lenders Handbook M26-7 Chapter 4: Credit Underwriting Topic 1: General Underwriting Information Change Date: February 22, 2019 · This chapter has been revised in its entirety
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. a.
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Underwriting Information VA Underwriting Standards require lenders to always utilize the following guidance when underwriting VA-guaranteed loans: Lenders are encouraged to make VA loans to all qualified Veterans who apply.
VA’s underwriting standards are intended to provide guidelines for underwriters.
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Decisions must be based on sound application of the standards, and underwriters are expected to use good judgment and flexibility in applying underwriting guidelines.
Not all possible circumstances are addressed therefore, underwriters must apply reasonable judgment and flexibility in administering this important Veterans’ benefit. b.
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Basic Requirements By law, VA may only guarantee a loan when it is possible to determine that the Veteran is a satisfactory credit risk, and has present or verified anticipated income that bears a proper relation to the anticipated terms of repayment.
VA’s underwriting standards are incorporated into VA regulations at 38 C.
F.
R. 36.4340 and explained in this chapter.
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F.
R. 36.4340 and explained in this chapter.
This chapter addresses the procedures for verifications and analysis involved in underwriting a VA-guaranteed loan.
In the event the lender fails to perform their responsibilities, VA may take administrative actions including removal of authority to underwrite and close VA loans. c.
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Lender’s Responsibility Lenders are responsible for: · developing all credit information, · properly obtaining all required verifications and the credit report, · ensuring the accuracy of all information on which the loan decision is based, · complying with the law and regulations governing VA’s underwriting standards, and with VA’s underwriting policies, procedures, and guidelines, and
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policies, procedures, and guidelines, and certifying as to compliance with all of the above
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Continued on next page 4-2 VA Lenders Handbook M26-7 Chapter 4: Credit Underwriting Topic 1: General Underwriting Information, continued d.
Lender’s Procedures Digital signatures can be accepted as an original signature or wet signature as defined by the Electronic Signatures in Global and National Commerce Act, commonly referred to as the E- sign Act.
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The procedures on the table below address only the credit underwriting of the loan.
Chapter 5 of this handbook provides all procedures that must be completed when making a VA loan.
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Table 1: Lender’s Credit Underwriting Procedures Step Action 1 Initiate the VA and Credit Alert Interactive Voice Response System (CAIVRS) inquiries described in Topic 4, Subsection c of this chapter. 2 Obtain all necessary verifications.
The borrower’s authorization can be obtained separately for the lender’s required verifications, or on one blanket authorization form.
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The Certificate of Eligibility (COE) obtained from WebLGY provides verification of the amount of the Veteran’s available entitlement, verification of exempt/non-exempt from the VA Funding Fee, and the amount of VA monthly service connected disability compensation.
Order the COE before ordering the VA appraisal.
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Order the COE before ordering the VA appraisal.
The tri-merged credit report and verifications can be ordered by the lender or its agent or a party designated by the lender to perform that function.
However, these documents must always be delivered by the credit reporting agency or verifying party directly to the lender or its agent, and never to another party.
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VA only permits the Veteran to pay for the credit report invoiced amount, not any additional costs that the lender may incur through other parties for obtaining the credit report. 3 Complete VA Form 26-6393, Loan Analysis, in conjunction with a careful review of the loan application and supporting documentation.
Provide any explanations in Item 47- Remarks.
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Provide any explanations in Item 47- Remarks.
The form is not required for Interest Rate Reduction Refinancing Loans (IRRRL) except IRRRLs to refinance delinquent VA loans. 4 Indicate the loan decision in Item 51 of the VA Form 26-6393, Loan Analysis, after ensuring that the treatment of income, debts, and credit is compliant with VA underwriting standards.
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Continued on next page 4-3 VA Lenders Handbook M26-7 Chapter 4: Credit Underwriting Topic 1: General Underwriting Information, continued e.
Underwriting Special Types of Loans The underwriting standards and procedures explained in this chapter generally apply to purchase and regular “cash-out” refinance loans.
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However, some special underwriting considerations also apply and can be found in Chapter 7 of this handbook. f.
Refinancing Loans The underwriting standards detailed in this chapter apply to purchases and regular “cash-out” refinances.
IRRRLs generally do not require any underwriting unless the loan is delinquent.
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IRRRLs made to refinance VA loans 30 days or more past due must be submitted to VA for prior approval underwriting.
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The underwriter must have concluded that: · the circumstances that caused the delinquency have been corrected, and · the Veteran can successfully maintain the new loan. · Refer to Chapter 6 of this handbook for details on all types of refinancing loans
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. 4-4 VA Lenders Handbook M26-7 Chapter 4: Credit Underwriting Topic 2: Income – Required Documentation and Analysis Change Date: February 22, 2019 · This chapter has been revised in its entirety. a.
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Underwriter’s Objectives It is the underwriter’s objective to identify and verify income available to meet: · the mortgage payment, · other shelter expenses, · debts and obligations, and · family living expenses. b.
Effective Income Income is considered effective when it is determined to be verifiable, stable and reliable, and anticipated to continue for the foreseeable future.
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Income analysis is not an exact science.
It requires the lender to underwrite each loan on a case-by-case basis, using good judgement and flexibility when warranted.
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To determine whether income is stable and reliable, the probability of continued employment must be determined through examination of the: · borrower’s past employment record, · borrower’s training, education, and qualifications for his or her current position, and/or · type of employment. · Only verified income can be considered in the repayment calculation. c.
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Spousal Income Verify and treat the income of a spouse who will be contractually obligated on the loan the same as you would the income of a Veteran borrower that will be obligated on the loan.
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However, to ensure compliance with the Equal Credit Opportunity Act (ECOA), do not ask questions about the income of the borrower’s spouse unless the: · spouse will be contractually liable, · borrower is relying on the spouse’s income to qualify, · borrower is relying on alimony, child support, or separate maintenance payments from the spouse or former spouse, or · borrower resides and/or the
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former spouse, or · borrower resides and/or the property is in a community property state
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In community property states, information concerning a spouse may be requested and considered in the same manner as for the borrower, even if the spouse will not be contractually obligated on the loan.
See Topic 5, subsection a, of this chapter for additional guidelines for community property states when considering a spouse’s debts and credit history.
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The non-purchasing spouse’s (NPS) credit history does not need to be considered; however, the NPS’ liabilities must be considered to determine the extent of the household liabilities.
Continued on next page 4-5 VA Lenders Handbook M26-7 Chapter 4: Credit Underwriting Topic 2: Income – Required Documentation and Analysis, continued d.
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ECOA Considerations Always inform the borrower (and spouse, if applicable) that they do not have to divulge information on the receipt of child support, alimony, or separate maintenance.
However, for this income to be considered in the loan analysis, it must be divulged and verified.
Income cannot be discounted because of sex, marital status, age, race, or other prohibited bases under ECOA. e.
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Income from Non-Military Employment Verify a minimum of 2 years of employment.
Generally, in the borrower’s current position, 2 years of employment is a positive indicator of continued employment.
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If the borrower has been employed by the present employer less than 2 years: · verify prior employment, plus present employment covering a total of 2 years, or · provide an explanation of why 2 years of employment could not be verified, · compare any different types of employment verifications obtained (such as Verification of Employment (VOE), paystub(s), W2s, and tax returns) for consistency,
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W2s, and tax returns) for consistency, and · clarify any substantial differences in the data that would have a bearing on the qualification of the borrower(s)
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Use of Employment Verification Services Lenders may use any employment verification service that provides the same information as the “full” verification generated through the “Work Number” for all applicants.
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Generally, this will include the following information: · the current date, · employer name and address, · Veteran’s full legal name, social security number (complete or truncated) and job title, · employment status (Active or Inactive), · length of employment and start date, · salary rate and pay frequency, · average hours per pay period, · summary of year to date information including base pay,
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of year to date information including base pay, overtime, commissions and bonuses, and reference number for the verification
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A current paystub is not required with an automated employment verification service.
Additionally, any VA Form 26-8497, Request for Verification of Employment (VOE) may be an original, faxed, or emailed copy of the original.
Previously, VA required an original VA Form 26-8497.
The requirements for obtaining a paystub have not changed.
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Hence, the paystub may be an original or a copy certified by the lender to be a true copy of the original.
The lender may not charge a fee to obtain the employment verification information.
Continued on next page 4-6 VA Lenders Handbook M26-7 Chapter 4: Credit Underwriting Topic 2: Income – Required Documentation and Analysis, continued e.
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Income from Non-Military Employment, continued Verification with VA Standard Documentation Acceptable verification consists of VA Form 26-8497, Request for Verification of Employment (VOE) or any format which furnishes the same information as VA Form 26- 8497, plus: · paystub(s) covering the most recent 30-day period with year-to-date information, if the employer normally provides a pay stub(s)
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if the employer normally provides a pay stub(s) to the borrower
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. · if the employer does not indicate the probability of continued employment on the VOE, the lender is not required to request anything additional on that subject.
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The VOE and paystub(s) must be no more than 120 days old (180 days for new construction) from the closing date. · For loans closed automatically, the date of the VOE and pay stub(s) must be within 120 days of the date the note is signed (180 days for new construction) from the closing date
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. · For prior approval loans, the date of the VOE and paystub(s) must be within 120 days of the date the application is received by VA (180 days for new construction) from the closing date.
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The VOE must be an original document or an electronic copy.
The paystub(s) may be an original, electronic, or a copy certified by the lender to be a true copy of the original document.
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VA_Guidelines.txt
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4729ffe1-24e4-48bd-93cc-87fe51c69c58
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Additional documentation for a borrower(s) employed in building trades or other seasonal or climate-dependent work must provide, in addition to the standard documentation (VOE and pay stub(s)), the following: · Documentation of the borrower’s total earnings year-to-date, · Signed and dated individual income tax returns for the previous 2 years, and · If the borrower works out of a union, evidence
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VA_Guidelines.txt
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095c954a-b7c7-433a-a582-a39851d033c1
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· If the borrower works out of a union, evidence of the union’s history with the borrower
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VA_Guidelines.txt
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296f07cd-67bc-4ca0-b595-5864db71b212
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.
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VA_Guidelines.txt
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86a199b1-3612-459d-8da2-cb7197158fb2
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Alternative Verification Documentation Alternative documentation may be submitted in place of a VOE if the lender concludes that the borrower’s income is stable, reliable, and anticipated to continue for the foreseeable future; that is, if the borrower’s income qualifies as effective income.
Two years of employment with the same employer is not required to reach this conclusion.
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VA_Guidelines.txt
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a1dee7ea-3138-4ceb-bfe5-e72cb45e6c3a
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Alternative documentation consists of: · paystub(s) covering at least the most recent 30-day period with year-to date information, · W-2 Forms for the most recent 2 years, and/or · telephone verification of the borrower’s current employment.
Continued on next page 4-7 VA Lenders Handbook M26-7 Chapter 4: Credit Underwriting Topic 2: Income – Required Documentation and Analysis, continued e.
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VA_Guidelines.txt
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3f22358e-f1e7-4bc4-baab-e55c384fc51a
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Income from Non-Military Employment, continued Document the date of the verification and the name, title, and telephone number of the person with whom employment is verified.
If the employer is not willing to give telephone verification of the borrower’s employment or if verification is in any way questionable, use standard documentation.
Alternative documentation cannot be used.
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VA_Guidelines.txt
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d7fc3c66-4970-4fb7-aebb-8cf5c8ec7452
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Alternative documentation cannot be used.
Paystub(s) and W-2 forms may be originals, electronic, or copies certified by the lender to be true copies of the originals. f.
Borrower Employed for Less than 12 Months Generally, employment less than 12 months is not considered stable and reliable.
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VA_Guidelines.txt
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9ffa3d21-18b0-460e-8025-cbae1ff21fd9
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However, the lender may consider the employment stable and reliable if the facts and documentation warrant such a conclusion.
Determine whether the borrower’s past employment, training, and/or education equipped him or her with particular skills that relate directly to the duties of their current position.
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VA_Guidelines.txt
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1048679b-bace-41e0-a172-3110086cea3d
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If the probability of continued employment is high based on these factors, then the lender may consider including the income in the total effective income.
An explanation of why income of less than 12 months duration was used must be documented on the VA 26-6393, Loan Analysis.
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VA_Guidelines.txt
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06ff4e16-9a75-4f68-92d0-d6415b65face
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If the probability of continued employment is good, but not well supported, the lender may utilize the income if the borrower has been employed at 12 months, to partially offset debts of 6 to 24 months duration.
An explanation of why income was used to offset debts must be documented on the VA 26-6393, Loan Analysis.
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VA_Guidelines.txt
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fdcc1c47-637c-4363-9f19-55e1d945f3a8
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A borrower may have a valid offer of employment which will begin at or after the anticipated date of closing which can be verified.
All data pertinent to underwriting procedures should be considered.
However, a paystub(s) may not be available. g.
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VA_Guidelines.txt
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8d72b979-afb6-4eef-a614-a61530d03a15
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However, a paystub(s) may not be available. g.
Recent History of Frequent Changes of Employment 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.
Analyze the reasons for the changes in employment.
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VA_Guidelines.txt
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f47a7ccd-9f3f-4d9a-b87e-288718b75ba2
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Give favorable consideration to changes for the purpose of career advancement in the same or related field.
Favorable consideration may not be possible for changes with no apparent betterment to the borrower and/or changes from one line of work to another.
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VA_Guidelines.txt
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c65c4d80-95b3-422b-9da8-46b845ff45d1
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If the lender includes the borrower’s income, an explanation of why income of short-term employment was used, must be documented on VA Form 26-6393, Loan Analysis.
Continued on next page 4-8 VA Lenders Handbook M26-7 Chapter 4: Credit Underwriting Topic 2: Income – Required Documentation and Analysis, continued h.
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VA_Guidelines.txt
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20ef1bf1-45eb-4bca-bb0b-1c9a231bdc10
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Income from Overtime Work, Part Time Jobs, Second Jobs, and Bonuses Generally, such income cannot be considered stable and reliable unless it has continued and is verified for 2 years.
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VA_Guidelines.txt
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9f01d7d5-39b2-4406-a588-1b058b5e7032
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To include income from these sources as income: · the income must be consistent, · there must be a reasonable likelihood that it will continue in the foreseeable future based on its compatibility with the hours of duty and other work conditions of the borrower’s primary job and, · how long the borrower has been employed under such an arrangement.
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VA_Guidelines.txt
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da30e51d-eb26-45e2-9729-d75ff6a1f72c
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The lender 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.
An explanation of why the income was used to offset must be documented on VA Form 26-6393, Loan Analysis. i.
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VA_Guidelines.txt
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651fadce-21f9-4ceb-9cf5-95e4abe55f30
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Income from Commissions Verify commission income by obtaining the VOE or other written verification which provides the following: · the actual amount of commissions paid year-to-date, · the basis for payments (salary plus commission, straight commission, or draws against commission, or other), and · when commissions are paid bi-weekly, monthly, quarterly, semiannually, annually, or other
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VA_Guidelines.txt
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c2232193-8843-4f37-9362-2928a1241b61
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. · individual income tax returns, signed and dated, plus all applicable schedules for the previous 2 years (or additional periods if needed to demonstrate a satisfactory earnings record).
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VA_Guidelines.txt
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099c3f1a-1e6b-44dd-b295-22e4c0009430
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Analyze Income Derived from Commissions Generally, income from commissions is considered stable when the borrower has obtained such income for at least 2 years.
Employment for less than 2 years cannot usually be considered stable unless the borrower has had previous related employment and/or specialized training.
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VA_Guidelines.txt
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1a6009e1-ad8e-4585-9502-9e533c2424dd
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Employment of less than 1 year can rarely qualify; however, in-depth development is required for a conclusion of stable income on less than 1 year cases.
For a borrower who will qualify using commission income of less than 25 percent of the total annual employment income, IRS Form 2106 expenses are not required to be deducted from income even if they are reported on IRS Form 2106.
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VA_Guidelines.txt
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68fea690-f79e-4f24-84ff-44ffb36ef9dd
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Additionally, the expenses are not required to be added as a monthly liability for the borrower.
For a borrower earning commission income that is 25 percent or more of annual employment income, IRS Form 2106 expenses must be deducted from gross commission income regardless of the length of time the borrower has filed the expenses with the IRS.
One exception is an automobile lease or loan payment.
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VA_Guidelines.txt
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