## Chapter 4. Credit Underwriting

#### Overview

+------------+---------------------------------------------------------+
| #          | > This chapter contains the following topics.           |
| #### In th |                                                         |
| is Chapter |                                                         |
+------------+---------------------------------------------------------+

  ------- --------------------------------------------------------- ------
  Topic   Topic Name                                                See
                                                                    Page

  1       How to Underwrite a VA Guaranteed Loan                    4-2

  2       Income                                                    4-6

  3       Income Taxes and Other Deductions from Income             4-25

  4       Assets                                                    4-27

  5       Debts and Obligations                                     4-29

  6       Required Search for and Treatment of Debts Owed to the    4-34
          Federal Government                                        

  7       Credit History                                            4-41

  8       Documentation for Automated Underwriting Cases            4-47

  9       How to Complete [VA Form                                  4-55
          26-6393](http://www.vba.va.gov/pubs/forms/26-6393.pdf),   
          Loan Analysis                                             

  10      How to Analyze the Information on [VA Form                4-60
          26-6393](http://www.vba.va.gov/pubs/forms/26-6393.pdf)    

  11      Examples of Underwriting Deficiencies                     4-64
  ------- --------------------------------------------------------- ------

#### 1. How to Underwrite a VA-Guaranteed Loan

+------------+---------------------------------------------------------+
| ##### C    | September 15, 2004, Change 4                            |
| hange Date |                                                         |
|            | -   This section has been changed to create subsection  |
|            |     lettering.                                          |
|            |                                                         |
|            | -   Subsection d step 6 has been changed to update      |
|            |     "Loan Prospector" to "Automated Underwriting."      |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ####       | > VA loans involve a veteran's benefit. Therefore,      |
| # a. VA Un | > lenders are encouraged to make VA loans to all        |
| derwriting | > qualified veterans who apply.                         |
|  Standards | >                                                       |
|            | > VA's underwriting standards are intended to provide   |
|            | > guidelines for lenders' underwriters as well as VA's  |
|            | > underwriters. Underwriting decisions must be based on |
|            | > sound application of the underwriting standards, and  |
|            | > underwriters are expected to use good judgment and    |
|            | > flexibility in applying the guidelines set forth in   |
|            | > the following pages.                                  |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### b    | > By law, VA may only guarantee a loan when it is       |
| . Basic Re | > possible to determine that the veteran:               |
| quirements |                                                         |
|            | -   is a satisfactory credit risk, and                  |
|            |                                                         |
|            | -   has present and anticipated income that bare a      |
|            |     proper relation to the contemplated terms of        |
|            |     repayment.                                          |
|            |                                                         |
|            |     > VA's underwriting standards are incorporated into |
|            |     > VA regulations at [38 CFR                         |
|            |     > 36.4337](http://ww                                |
|            | w.warms.vba.va.gov/Regs/38CFR/BOOKH/PART36/36_4337.doc) |
|            |     > and explained in this chapter. This chapter       |
|            |     > addresses the verifications, procedures, and      |
|            |     > analysis involved in underwriting a VA-guaranteed |
|            |     > loan. It provides guidance on how to treat        |
|            |     > income, debts and obligations, credit history,    |
|            |     > and so on, and how to present and analyze these   |
|            |     > items on VA's loan analysis form. It does not     |
|            |     > deal with every possible circumstance that will   |
|            |     > arise; therefore, underwriters must apply         |
|            |     > reasonable judgment and flexibility in            |
|            |     > administering this important veteran's benefit.   |
+------------+---------------------------------------------------------+

Continued on next page

1\. How to Underwrite a VA-Guaranteed Loan, Continued

+------------+---------------------------------------------------------+
| ##### c. L | > Lenders are responsible for:                          |
| ender Resp |                                                         |
| onsibility | -   developing all credit information                   |
|  {#c.-lend |                                                         |
| er-respons | -   properly obtaining all required verifications and   |
| ibility .u |     the credit report                                   |
| nnumbered} |                                                         |
|            | -   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                                                 |
|            |                                                         |
|            | -   certifying as to compliance with all of the above.  |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##         | > [Section 2 of chapter                                 |
| ### d. Len | > 5](http://                                            |
| der Proced | www.warms.vba.va.gov/admin26/pamphlet/pam26_7/ch05.doc) |
| ures {#d.- | > provides an overview of all procedures which must be  |
| lender-pro | > completed when making a VA loan. The procedures below |
| cedures .u | > address only the credit underwriting of the loan.     |
| nnumbered} |                                                         |
+------------+---------------------------------------------------------+

+-------+--------------------------------------------------------------+
| Step  | Action                                                       |
+-------+--------------------------------------------------------------+
| 1     | Initiate the VA and CAIVRS inquiries described in section 6  |
|       | of this chapter.                                             |
+-------+--------------------------------------------------------------+
| 2     | Obtain all necessary verifications.                          |
|       |                                                              |
|       | -   The applicant's authorization can be obtained for each   |
|       |     verification needed, or on 1 blanket authorization form  |
|       |     (attach a copy of the blanket authorization to each      |
|       |     verification requested, including [VA Form               |
|       |     26-8937](http://www.vba.va.gov/pubs/forms/26-8937.pdf),  |
|       |     Verification of VA Benefits, if applicable).             |
|       |                                                              |
|       | -   The 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. That    |
|       |     is, while a lender may delegate authority for a builder, |
|       |     realtor, or other person to order the report for the     |
|       |     lender, the report may not be delivered to such builder, |
|       |     realtor, and so on, and may not pass through the hands   |
|       |     of any such party or the applicant.                      |
+-------+--------------------------------------------------------------+
| 3     | Compare similar information received from different sources  |
|       | and resolve any discrepancies. For example, the number of    |
|       | dependents provided on the URLA, tax returns, credit report, |
|       | and so on, should be the same. In addition, the status of    |
|       | debts provided on the URLA and credit report should be the   |
|       | same.                                                        |
+-------+--------------------------------------------------------------+

Continued on next page

1\. How to Underwrite a VA-Guaranteed Loan, Continued

  -----------------------------------------------------------------------
  d\. Lender Procedures (continued)

  -----------------------------------------------------------------------

+-------+--------------------------------------------------------------+
| Step  | Action                                                       |
+-------+--------------------------------------------------------------+
| 4     | Complete [VA Form                                            |
|       | 26-6393](http://www.vba.va.gov/pubs/forms/26-6393.pdf), Loan |
|       | Analysis, in conjunction with a careful review of the loan   |
|       | application and supporting documentation.                    |
|       |                                                              |
|       | The form is not required for IRRRLs (except IRRRLs to        |
|       | refinance delinquent VA loans).                              |
+-------+--------------------------------------------------------------+
| 5     | Indicate the loan decision in item 50 of the [Loan           |
|       | Analysis](http://www.vba.va.gov/pubs/forms/26-6393.pdf)      |
|       | after ensuring that the treatment of income, debts, and      |
|       | credit is in compliance with VA underwriting standards.      |
+-------+--------------------------------------------------------------+
| 6     | ***Loans closed by an automatic lender***                    |
|       |                                                              |
|       | The underwriter must certify review and approval of the loan |
|       | by signing item 51 of the Loan Analysis (for Automated       |
|       | Underwriting cases , see section 8 of this chapter.          |
|       |                                                              |
|       | ***Note***: For nonsupervised automatic lenders, line 51     |
|       | signature must be a VA-approved underwriter.                 |
|       |                                                              |
|       | ***Prior approval loans***                                   |
|       |                                                              |
|       | The individual with authority to determine that the loan     |
|       | meets VA credit standards and should be submitted to VA,     |
|       | must sign item 51 of the Loan Analysis.                      |
+-------+--------------------------------------------------------------+
| 7     | An officer of the lender authorized to execute documents and |
|       | act on behalf of the lender must complete the following      |
|       | certification: "The undersigned lender certifies that the    |
|       | loan application, all verifications of employment, deposit,  |
|       | and other income and credit verification documents have been |
|       | processed in compliance with 38 CFR Part 36; that all credit |
|       | reports obtained in connection with the processing of this   |
|       | borrower's loan application have been provided to VA; that,  |
|       | to the best of the undersigned lender's knowledge and        |
|       | belief, the loan meets the underwriting standards recited in |
|       | chapter 37 of title 38 United States Code and 38 CFR Part    |
|       | 36; and that all information provided in support of this     |
|       | loan is true, complete and accurate to the best of the       |
|       | undersigned lender's knowledge and belief."                  |
+-------+--------------------------------------------------------------+

Continued on next page

1\. How to Underwrite a VA-Guaranteed Loan, Continued

+------------+---------------------------------------------------------+
| ##### e.   | > The underwriting standards and procedures explained   |
|  Underwrit | > in this chapter apply to these special types of loans |
| ing Specia | > generally. However, some special underwriting         |
| l Types of | > considerations also apply and can be found as         |
|  Loans {#e | > follows:                                              |
| .-underwri |                                                         |
| ting-speci |                                                         |
| al-types-o |                                                         |
| f-loans .u |                                                         |
| nnumbered} |                                                         |
+------------+---------------------------------------------------------+

  ------------------------------------------------- -------------------------------------------------------------------- ---------
  Type of Loan                                      Chapter                                                              Section

  Joint Loans                                       [7](http://www.warms.vba.va.gov/admin26/pamphlet/pam26_7/ch07.doc)   1

  Energy Efficient Mortgages (EEMs)                 [7](http://www.warms.vba.va.gov/admin26/pamphlet/pam26_7/ch07.doc)   3

  Graduated Payment Mortgages (GPMs)                [7](http://www.warms.vba.va.gov/admin26/pamphlet/pam26_7/ch07.doc)   7

  Growing Equity Mortgages (GEMs)                   [7](http://www.warms.vba.va.gov/admin26/pamphlet/pam26_7/ch07.doc)   8

  Loans Involving Temporary Interest Rate Buydowns  [7](http://www.warms.vba.va.gov/admin26/pamphlet/pam26_7/ch07.doc)   9

  Farm Residence Loans                              [7](http://www.warms.vba.va.gov/admin26/pamphlet/pam26_7/ch07.doc)   10
  ------------------------------------------------- -------------------------------------------------------------------- ---------

+------------+---------------------------------------------------------+
| ##         | > While the underwriting standards detailed in this     |
| ### f. Ref | > chapter apply to "cash-out" refinances, IRRRLs        |
| inancing L | > generally do not require any underwriting.            |
| oans {#f.- |                                                         |
| refinancin | > IRRRLs made to refinance VA loans 30 days or more     |
| g-loans .u | > past due must be submitted to VA for prior approval.  |
| nnumbered} | > It must be reasonable to conclude that:               |
|            |                                                         |
|            | -   the circumstances that caused the delinquency have  |
|            |     been corrected, and                                 |
|            |                                                         |
|            | -   the veteran can successfully maintain the new loan. |
|            |                                                         |
|            |     > ***Reference***: See [chapter                     |
|            |     > 6](http://                                        |
|            | www.warms.vba.va.gov/admin26/pamphlet/pam26_7/ch06.doc) |
|            |     > for details on all types of refinancing loans.    |
+------------+---------------------------------------------------------+

#### 2. Income {#income .unnumbered}

+------------+---------------------------------------------------------+
| ##### C    | > July 20, 2007, Change 5                               |
| hange Date |                                                         |
|            | -   This section has been changed to create subsection  |
|            |     lettering.                                          |
|            |                                                         |
|            | -   Subsection k has been changed to remove references  |
|            |     to DD Form 1747 and obtaining active duty officer   |
|            |     release dates.                                      |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| #####      | > Identify and verify income available to meet:         |
|  a. Underw |                                                         |
| riter's Ob | -   the mortgage payment                                |
| jectives { |                                                         |
| #a.-underw | -   other shelter expenses                              |
| riters-obj |                                                         |
| ectives .u | -   debts and obligations, and                          |
| nnumbered} |                                                         |
|            | -   family living expenses.                             |
|            |                                                         |
|            |     > Evaluate whether verified income is:              |
|            |                                                         |
|            | -   stable and reliable                                 |
|            |                                                         |
|            | -   anticipated to continue during the foreseeable      |
|            |     future, and                                         |
|            |                                                         |
|            | -   sufficient in amount.                               |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### b. I | > **Only verified income can be considered in total     |
| mportance  | > effective income**.                                   |
| of Verific |                                                         |
| ation {#b. |                                                         |
| -importanc |                                                         |
| e-of-verif |                                                         |
| ication .u |                                                         |
| nnumbered} |                                                         |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ####       | > Verify and treat the income of a spouse who will be   |
| # c. Incom | > contractually obligated on the loan the same as the   |
| e of a Spo | > veteran's income.                                     |
| use {#c.-i |                                                         |
| ncome-of-a | > To ensure compliance with the Equal Credit            |
| -spouse .u | > Opportunity Act (ECOA), do **not** ask questions      |
| nnumbered} | > about the income of an applicant's spouse unless the: |
|            |                                                         |
|            | -   spouse will be contractually liable                 |
|            |                                                         |
|            | -   applicant is relying on the spouse's income to      |
|            |     qualify                                             |
|            |                                                         |
|            | -   applicant is relying on alimony, child support, or  |
|            |     separate maintenance payments from the spouse or    |
|            |     former spouse, or                                   |
|            |                                                         |
|            | -   applicant resides in a community property State or  |
|            |     the security is in such a State.                    |
|            |                                                         |
|            | > ***Note***: In community property States, information |
|            | > concerning a 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.                                                 |
+------------+---------------------------------------------------------+

Continued on next page

2\. Income, Continued

+------------+---------------------------------------------------------+
| #####      | > Restrict inquiries related to the applicant's spouse  |
| d. ECOA Co | > to the situations listed in the "Income of a Spouse"  |
| nsideratio | > heading in this section.                              |
| ns {#d.-ec |                                                         |
| oa-conside | > Always inform the applicant (and spouse, if           |
| rations .u | > applicable) that they do not have to divulge          |
| nnumbered} | > information on the receipt of child support, alimony, |
|            | > or separate maintenance. However, in order 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.                                                 |
|            |                                                         |
|            | > Treat income from all sources equally; that is, the   |
|            | > fact that all or part of an applicant's income is     |
|            | > derived from any public assistance program is not     |
|            | > treated as a negative factor, provided the income is  |
|            | > stable and reliable.                                  |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### e.   | > ***Verification: General Requirement***               |
|  Income fr |                                                         |
| om Non-Mil | > Verify a minimum of two years employment.             |
| itary Empl |                                                         |
| oyment {#e | > If the applicant has been employed by the present     |
| .-income-f | > employer less than two years:                         |
| rom-non-mi |                                                         |
| litary-emp | -   verify prior employment plus present employment     |
| loyment .u |     covering a total of two years                       |
| nnumbered} |                                                         |
|            | -   provide an explanation of why two years employment  |
|            |     could not be verified                               |
|            |                                                         |
|            | -   compare any different types of employment           |
|            |     verifications obtained (such as, Verification of    |
|            |     Employment, pay stubs, tax returns for consistency, |
|            |     and                                                 |
|            |                                                         |
|            | -   clarify any substantial differences in the data     |
|            |     that would have a bearing on the qualification of   |
|            |     the applicant.                                      |
|            |                                                         |
|            |     > ***Verification: Employment Verification          |
|            |     > Services***                                       |
|            |                                                         |
|            | Lenders may use VOEs supplied by an employment          |
|            | verification service only if VA has approved the use of |
|            | VOEs from that particular provider. VA has approved     |
|            | "FULL" verifications of employment through "The Work    |
|            | Number for Everyone," a service of the TALX             |
|            | Corporation. (No pay stub is needed with the TALX       |
|            | verification.)                                          |
+------------+---------------------------------------------------------+

Continued on next page

2\. Income, Continued

+------------+---------------------------------------------------------+
| ##### e. I | > ***Verification: Standard Documentation***            |
| ncome from |                                                         |
|  Non-Milit | > Acceptable verification consists of:                  |
| ary Employ |                                                         |
| ment (cont | -   [VA Form                                            |
| inued) {#e |                                                         |
| .-income-f | 26-8497](http://www.vba.va.gov/pubs/forms/26-8497.pdf), |
| rom-non-mi |     Request for Verification of Employment (VOE) or any |
| litary-emp |     format which furnishes the same information as [VA  |
| loyment-co |     Form                                                |
| ntinued .u |                                                         |
| nnumbered} | 26-8497](http://www.vba.va.gov/pubs/forms/26-8497.pdf), |
|            |     **plus**                                            |
|            |                                                         |
|            | -   a pay stub if the employer normally provides one to |
|            |     the applicant.                                      |
|            |                                                         |
|            |     > 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.                       |
|            |                                                         |
|            |     > The VOE and pay stub must be no more than 120     |
|            |     > days old (180 days for new construction).         |
|            |                                                         |
|            | -   For loans closed automatically, the date of the VOE |
|            |     and pay stub 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 VOE and   |
|            |     pay stub must be within 120 days of the date the    |
|            |     application is received by VA (180 days for new     |
|            |     construction).                                      |
|            |                                                         |
|            |     > The VOE must be an original. The pay stub may be  |
|            |     > an original or a copy certified by the lender to  |
|            |     > be a true copy of the original.                   |
|            |                                                         |
|            |     > ***Note***: It is acceptable for Department of    |
|            |     > Defense civilian employees to provide computer    |
|            |     > generated pay stubs accessed through myPay        |
|            |     > (formerly known as E/MSS - Employee Member Self   |
|            |     > Service).                                         |
|            |                                                         |
|            |     > ***Verification: Additional Documentation for     |
|            |     > Persons Employed in the Building Trades or Other  |
|            |     > Seasonal or Climate-Dependent Work***             |
|            |                                                         |
|            |     > In addition to the standard documentation (VOE    |
|            |     > and pay stub), obtain:                            |
|            |                                                         |
|            | -   documentation evidencing the applicant's total      |
|            |     earnings year to date                               |
|            |                                                         |
|            | -   signed and dated individual income tax returns for  |
|            |     the previous two years, and                         |
|            |                                                         |
|            | -   if applicant works out of a union, evidence of the  |
|            |     union's history with the applicant.                 |
+------------+---------------------------------------------------------+

Continued on next page

2\. Income, Continued

+------------+---------------------------------------------------------+
| e\. Income | > ***Verification: Alternative Documentation***         |
| from       | >                                                       |
| No         | > Alternative documentation may be submitted in place   |
| n-Military | > of a VOE if the lender concludes that the applicant's |
| Employment | > income **is** stable, reliable, and anticipated to    |
| (          | > continue during the foreseeable future; that is, if   |
| continued) | > the applicant's income qualifies as effective income. |
|            | >                                                       |
|            | > Two years employment is not required to reach this    |
|            | > conclusion.                                           |
|            | >                                                       |
|            | > Alternative documentation consists of:                |
|            |                                                         |
|            | -   Pay stubs covering at least the most recent 30-day  |
|            |     period.                                             |
|            |                                                         |
|            | > ***Note***: It is acceptable for Department of        |
|            | > Defense civilian employees                            |
|            |                                                         |
|            | to provide computer generated pay stubs accessed        |
|            | through myPay (formerly                                 |
|            |                                                         |
|            | known as E/MSS - Employee Member Self Service).         |
|            |                                                         |
|            | -   W-2 forms for the previous two years.               |
|            |                                                         |
|            | -   Telephone verification of the applicant's current   |
|            |     employment.                                         |
|            |                                                         |
|            | ***Note***: Document the date of verification and the   |
|            | name, title, and telephone                              |
|            |                                                         |
|            | number of the person with whom employment was verified. |
|            |                                                         |
|            | > If the employer is **not** willing to give telephone  |
|            | > verification of applicant's employment or the pay     |
|            | > stubs or W-2 forms are in any way questionable as to  |
|            | > authenticity, use standard documentation. Alternative |
|            | > documentation cannot be used.                         |
|            |                                                         |
|            | > Pay stubs and W-2 forms may be originals or copies    |
|            | > certified by the lender to be true copies of the      |
|            | > originals.                                            |
+------------+---------------------------------------------------------+

Continued on next page

2\. Income, Continued

+------------+---------------------------------------------------------+
| e\. Income | > ***Verification: Fax and Internet***                  |
| from       |                                                         |
| No         | > Fax and Internet documentation may be submitted in    |
| n-Military | > place of a VOE if the lender concludes that the       |
| Employment | > applicant's income **is** stable, reliable, and       |
| (          | > anticipated to continue during the foreseeable        |
| continued) | > future; that is, if the applicant's income qualifies  |
|            | > as effective income.                                  |
|            |                                                         |
|            | > Fax and Internet documentation consists of:           |
|            |                                                         |
|            | -   the same information contained in a standard VOE.   |
|            |                                                         |
|            | -   clear identification of the employer and source of  |
|            |     information.                                        |
|            |                                                         |
|            | -   name and telephone number of a person who can       |
|            |     verify faxed information.                           |
|            |                                                         |
|            | > Lenders are responsible for ensuring the authenticity |
|            | > of the documents. For Faxed documents, review the     |
|            | > "banner" information provided at the top of each page |
|            | > of the fax. For Internet documents, review the        |
|            | > information contained on any headers/footers and the  |
|            | > banner portion of the downloaded webpage(s). These    |
|            | > pages must contain the uniform resource locator (URL) |
|            | > and the date and time printed. The documents should   |
|            | > also be reviewed for errors such as incorrect area    |
|            | > codes, unreadable names or income, etc.               |
|            |                                                         |
|            | > ***Analysis: General Guidance***                      |
|            |                                                         |
|            | > Income analysis is not an exact science. It requires  |
|            | > the lender to underwrite each loan on a case-by-case  |
|            | > basis, using:                                         |
|            |                                                         |
|            | -   judgment                                            |
|            |                                                         |
|            | -   common sense, and                                   |
|            |                                                         |
|            | -   flexibility, when warranted.                        |
|            |                                                         |
|            |     > Analyze the probability of continued employment   |
|            |     > (that is, whether income is stable and reliable)  |
|            |     > by examining the:                                 |
|            |                                                         |
|            | -   applicant's past employment record                  |
|            |                                                         |
|            | -   applicant's training, education, and qualifications |
|            |     for his/her position                                |
|            |                                                         |
|            | -   type of employment, and                             |
|            |                                                         |
|            | -   employer's confirmation of continued employment, if |
|            |     provided.                                           |
|            |                                                         |
|            |     > Two years' employment in the applicant's current  |
|            |     > position is a positive indicator of continued     |
|            |     > employment. It is **not** a required minimum and  |
|            |     > **not** always sufficient by itself to reach a    |
|            |     > conclusion on the probability of continued        |
|            |     > employment.                                       |
+------------+---------------------------------------------------------+

Continued on next page

2\. Income, Continued

+------------+---------------------------------------------------------+
| ###        | > Generally, employment less than 12 months is **not**  |
| ## f. Anal | > considered stable and reliable. However, it may be    |
| ysis: Appl | > considered stable and reliable if the individual      |
| icant Empl | > facts warrant such a conclusion. Carefully consider:  |
| oyed Less  |                                                         |
| Than 12 Mo | -   the employer's evaluation of the probability of     |
| nths {#f.- |     continued employment, if provided.                  |
| analysis-a |                                                         |
| pplicant-e | -   assess whether the applicant's training and/or      |
| mployed-le |     education equipped him or her with particular       |
| ss-than-12 |     skills that relate directly to the duties of        |
| -months .u |     his/her current position. This generally applies to |
| nnumbered} |     skilled positions. Examples include nurse, medical  |
|            |     technician, lawyer, paralegal, and computer systems |
|            |     analyst.                                            |
|            |                                                         |
|            | 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. An explanation of why income of |
|            | less than 12 months duration was used must accompany    |
|            | the loan submission.                                    |
|            |                                                         |
|            | If the probability of continued employment is good, but |
|            | not as well supported, the lender may still consider    |
|            | the income if the applicant has been employed at least  |
|            | six months to partially offset debts of 10 to 24 months |
|            | duration.                                               |
|            |                                                         |
|            | Determine the amount which can be used, based on such   |
|            | factors as:                                             |
|            |                                                         |
|            | -   the employer's evaluation of the probability of     |
|            |     continued employment, if provided.                  |
|            |                                                         |
|            | -   the length of employment (for example, ten months   |
|            |     versus six months).                                 |
|            |                                                         |
|            | -   include an explanation with the loan submission.    |
+------------+---------------------------------------------------------+

Continued on next page

2\. Income, Continued

+------------+---------------------------------------------------------+
| ###        | > Short-term employment in a present position combined  |
| ## g. Anal | > with frequent changes of employment in the recent     |
| ysis: Rece | > past requires special consideration to determine      |
| nt History | > stability of income. Analyze the reasons for the      |
|  of Freque | > changes in employment.                                |
| nt Changes |                                                         |
|  of Employ | > ***Reference***: See [section 4 of "Current           |
| ment {#g.- | > Issues"](http://ww                                    |
| analysis-r | w.warms.vba.va.gov/admin26/pamphlet/pam26_7/issues.doc) |
| ecent-hist | > for a discussion of frequent job changes by           |
| ory-of-fre | > individuals with low-to-moderate incomes.             |
| quent-chan |                                                         |
| ges-of-emp | > Give favorable consideration to changes for the       |
| loyment .u | > purpose of career advancement in the same or related  |
| nnumbered} | > field.                                                |
|            |                                                         |
|            | > Favorable consideration may not be possible for       |
|            | > changes:                                              |
|            |                                                         |
|            | -   with no apparent betterment to the applicant, and   |
|            |                                                         |
|            | -   from one line of work to another.                   |
|            |                                                         |
|            |     > If the lender includes applicant's income in      |
|            |     > effective income, an explanation must accompany   |
|            |     > the loan submission.                              |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### h.   | > Generally, such income cannot be considered stable    |
| Income fro | > and reliable unless it has continued (and is          |
| m Overtime | > verified) for two years.                              |
|  Work, Par |                                                         |
| t-time Job | > To include income from these sources in effective     |
| s, Second  | > income:                                               |
| Jobs, and  |                                                         |
| Bonuses {# | -   the income must be regular and predictable, and     |
| h.-income- |                                                         |
| from-overt | -   there must be a reasonable likelihood that it will  |
| ime-work-p |     continue in the foreseeable future based on         |
| art-time-j |                                                         |
| obs-second | ```{=html}                                              |
| -jobs-and- | <!-- -->                                                |
| bonuses .u | ```                                                     |
| nnumbered} | -   its compatibility with the hours of duty and other  |
|            |     work conditions of the applicant's primary job, and |
|            |                                                         |
|            | -   how long the applicant has been employed under such |
|            |     arrangement.                                        |
|            |                                                         |
|            |     > The lender may use this income, if it is not      |
|            |     > eligible for inclusion in effective income, but   |
|            |     > is verified for at least 12 months, to offset     |
|            |     > debts of 10 to 24 months duration. Include an     |
|            |     > explanation.                                      |
+------------+---------------------------------------------------------+

Continued on next page

2\. Income, Continued

+------------+---------------------------------------------------------+
| ####       | > ***Verification***                                    |
| # i. Incom |                                                         |
| e from Com | > When all or a major portion of the applicant's income |
| missions { | > is derived from commissions, obtain the following     |
| #i.-income | > documentation:                                        |
| -from-comm |                                                         |
| issions .u | -   verification of employment or other written         |
| nnumbered} |     verification which provides the following:          |
|            |                                                         |
|            | ```{=html}                                              |
|            | <!-- -->                                                |
|            | ```                                                     |
|            | -   the actual amount of commissions paid year-to-date. |
|            |                                                         |
|            | -   the basis for payment (that is, salary plus         |
|            |     commission, straight commission, or draws against   |
|            |     commission).                                        |
|            |                                                         |
|            | -   when commissions are paid (that is, monthly,        |
|            |     quarterly, semiannually, or annually).              |
|            |                                                         |
|            | ```{=html}                                              |
|            | <!-- -->                                                |
|            | ```                                                     |
|            | -   individual income tax returns, signed and dated,    |
|            |     plus all applicable                                 |
|            |                                                         |
|            | -   schedules for the previous two years (or additional |
|            |     periods if needed to demonstrate a satisfactory     |
|            |     earnings record).                                   |
|            |                                                         |
|            |     > ***Analysis***                                    |
|            |                                                         |
|            |     > Generally, income from commissions is considered  |
|            |     > stable when the applicant has obtained such       |
|            |     > income for at least two years.                    |
|            |                                                         |
|            | -   Less than two years cannot usually be considered    |
|            |     stable unless the applicant has had previous        |
|            |     related employment and/or extensive specialized     |
|            |     training.                                           |
|            |                                                         |
|            | -   Less than one year can rarely qualify. In-depth     |
|            |     development is required for a conclusion of stable  |
|            |     income on less than one year cases.                 |
+------------+---------------------------------------------------------+

Continued on next page

2\. Income, Continued

+------------+---------------------------------------------------------+
| ##         | > ***Verification***                                    |
| ### j. Sel |                                                         |
| f-Employme | > Obtain the following documentation:                   |
| nt Income  |                                                         |
| {#j.-self- | -   current financial statements prepared in a          |
| employment |     generally recognized format, including:             |
| -income .u |                                                         |
| nnumbered} | ```{=html}                                              |
|            | <!-- -->                                                |
|            | ```                                                     |
|            | -   year-to-date profit and loss statement              |
|            |                                                         |
|            | -   current balance sheet                               |
|            |                                                         |
|            | > ***Note***: The financial statements must be          |
|            | > sufficient for a loan underwriter to determine the    |
|            | > necessary information for loan approval. The lender   |
|            | > may require accountant-prepared financial statements  |
|            | > or financial statements audited by a Certified Public |
|            | > Accountant if needed to make such a determination due |
|            | > to the nature of the business or the content of the   |
|            | > financial statements.                                 |
|            |                                                         |
|            | -   individual income tax returns, signed and dated,    |
|            |     plus all applicable schedules for the previous two  |
|            |     years (or additional periods if needed to           |
|            |     demonstrate a satisfactory earnings record).        |
|            |                                                         |
|            | -   if the most recent year's tax return has not yet    |
|            |     been prepared, provide a profit and loss statement  |
|            |     for that year, and                                  |
|            |                                                         |
|            | -   if the business is a corporation or partnership     |
|            |                                                         |
|            | ```{=html}                                              |
|            | <!-- -->                                                |
|            | ```                                                     |
|            | -   copies of the signed federal business income tax    |
|            |     returns for the previous two years plus all         |
|            |     applicable schedules, and                           |
|            |                                                         |
|            | -   a list of all stockholders or partners showing the  |
|            |     interest each holds in the business.                |
|            |                                                         |
|            | > ***Note***: Obtain a written credit report on the     |
|            | > business as well as the applicant as needed.          |
|            |                                                         |
|            | > ***Analysis***                                        |
|            |                                                         |
|            | > Generally, income from self-employment is considered  |
|            | > stable when the applicant has been in business for at |
|            | > least two years.                                      |
|            |                                                         |
|            | -   Less than two years cannot usually be considered    |
|            |     stable unless the applicant has had previous        |
|            |     related employment and/or extensive specialized     |
|            |     training.                                           |
|            |                                                         |
|            | -   Less than one year can rarely qualify.              |
|            |                                                         |
|            |     -   in-depth development is required for a          |
|            |         conclusion of stable income on less than one    |
|            |         year cases.                                     |
+------------+---------------------------------------------------------+

Continued on next page

2\. Income, Continued

+------------+---------------------------------------------------------+
| j\.        | > Analyze the general economic outlook for similar      |
| Self-      | > businesses to determine whether the business can be   |
| Employment | > expected to generate sufficient income for the        |
| Income     | > applicant's future needs.                             |
| (          |                                                         |
| continued) | > If the business shows a steady or significant decline |
|            | > in earnings over the period analyzed, the reasons for |
|            | > such decline must be analyzed to determine whether    |
|            | > the trend is likely to continue or be reversed.       |
|            |                                                         |
|            | > If the business is unusual and it is difficult to     |
|            | > determine the probability of continued operation,     |
|            | > obtain an opinion on viability and future earnings,   |
|            | > and an explanation of the function and financial      |
|            | > operations of the business from a qualified party.    |
|            |                                                         |
|            | > Depreciation claimed as a deduction on the tax        |
|            | > returns and financial statements of the business may  |
|            | > be included in effective income.                      |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| #####      | > ***Verification***                                    |
|  k. Active |                                                         |
|  Military  | > A military Leave and Earnings Statement (LES) is      |
| Applicant' | > required instead of a VOE.                            |
| s Income { |                                                         |
| #k.-active | -   The LES must furnish the same information as a VOE. |
| -military- |                                                         |
| applicants | -   The LES must be no more than 120 days old (180 days |
| -income .u |     for new construction).                              |
| nnumbered} |                                                         |
|            | -   For loans closed automatically, the date of the LES |
|            |     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 LES must  |
|            |     be within 120 days of the date the application is   |
|            |     received by VA (180 days for new construction).     |
|            |                                                         |
|            |     > The LES must be an original or a copy certified   |
|            |     > by the lender to be a true copy of the original.  |
|            |                                                         |
|            | > ***Note***: The Department of Defense provides        |
|            | > service members access to a computer generated LES    |
|            | > through myPay (formerly known as E/MSS - Employee     |
|            | > Member Self Service). This type of LES is acceptable. |
|            |                                                         |
|            | > In addition, identify service members who are within  |
|            | > 12 months of release from active duty or end of       |
|            | > contract term. Find the date of expiration of the     |
|            | > applicant's current contract for active service on    |
|            | > the LES (for an enlisted service member) . For a      |
|            | > National Guard or Reserve member, find the expiration |
|            | > date of the applicant's current contract.             |
+------------+---------------------------------------------------------+

Continued on next page

2\. Income, Continued

+------------+---------------------------------------------------------+
| k\. Active | > ***Verification*** (continued)                        |
| Military   |                                                         |
| A          | > If the date is within 12 months of the anticipated    |
| pplicant's | > date that the loan will close, the loan package must  |
| Income     | > also include one of the following four items, or      |
| (          | > combinations of items, to be acceptable:              |
| continued) |                                                         |
|            | -   documentation that the service member has already   |
|            |     re-enlisted or extended his/her period of active    |
|            |     duty to a date beyond the 12 month period following |
|            |     the projected closing of the loan, or               |
|            |                                                         |
|            | -   verification of a valid offer of local civilian     |
|            |     employment following the release from active duty.  |
|            |     All data pertinent to sound underwriting procedures |
|            |     (date employment will begin, earnings, and so on)   |
|            |     must be included, or                                |
|            |                                                         |
|            | -   a statement from the service member that he/she     |
|            |     intends to reenlist or extend his/her period of     |
|            |     active duty to a date beyond the 12 month period,   |
|            |     plus                                                |
|            |                                                         |
|            | -   a statement from the service member's commanding    |
|            |     officer confirming that:                            |
|            |                                                         |
|            | ```{=html}                                              |
|            | <!-- -->                                                |
|            | ```                                                     |
|            | -   the service member is eligible to reenlist or       |
|            |     extend his/her active duty as indicated, and        |
|            |                                                         |
|            | -   the commanding officer has no reason to believe     |
|            |     that such reenlistment or extension of active duty  |
|            |     will not be granted, or                             |
|            |                                                         |
|            | ```{=html}                                              |
|            | <!-- -->                                                |
|            | ```                                                     |
|            | -   documentation of other unusually strong positive    |
|            |     underwriting factors, such as:                      |
|            |                                                         |
|            | ```{=html}                                              |
|            | <!-- -->                                                |
|            | ```                                                     |
|            | -   a down payment of at least 10 percent               |
|            |                                                         |
|            | -   significant cash reserves, and                      |
|            |                                                         |
|            | -   clear evidence of strong ties to the community      |
|            |     coupled with a nonmilitary spouse's income so high  |
|            |     that only minimal income from the active duty       |
|            |     service member is needed to qualify.                |
|            |                                                         |
|            |     > ***Analysis: Base Pay***                          |
|            |                                                         |
|            |     > Consider the applicant's base pay as stable and   |
|            |     > reliable except if the applicant is within 12     |
|            |     > months of release from active duty:               |
|            |                                                         |
|            | ```{=html}                                              |
|            | <!-- -->                                                |
|            | ```                                                     |
|            | -   analyze the additional documentation submitted.     |
|            |                                                         |
|            | -   if the applicant will not be reenlisting, determine |
|            |     whether                                             |
|            |                                                         |
|            | ```{=html}                                              |
|            | <!-- -->                                                |
|            | ```                                                     |
|            | -   the applicant's anticipated source of income is     |
|            |     stable and reliable, and/or                         |
|            |                                                         |
|            | -   unusually strong underwriting factors compensate    |
|            |     for any unknowns regarding future sources of        |
|            |     income.                                             |
+------------+---------------------------------------------------------+

Continued on next page

2\. Income, Continued

+------------+---------------------------------------------------------+
| k\. Active | > ***Analysis: Military Quarters Allowance***           |
| Military   | >                                                       |
| A          | > The lender may include a military quarters allowance  |
| pplicant's | > in effective income if properly verified. In most     |
| Income     | > areas there will be an additional variable housing    |
| (          | > allowance, which can also be included.                |
| continued) |                                                         |
|            | -   The military quarters and variable housing          |
|            |     allowances are **not** taxable income.              |
|            |                                                         |
|            | -   Ensure that the applicant meets the occupancy       |
|            |     requirements set forth in [section 5 of chapter     |
|            |     3](http://w                                         |
|            | ww.warms.vba.va.gov/admin26/pamphlet/pam26_7/ch03.doc). |
|            |                                                         |
|            |     > ***Verification: Subsistence and Clothing         |
|            |     > Allowances***                                     |
|            |                                                         |
|            |     > Any subsistence (rations) and clothing allowances |
|            |     > are indicated on the LES.                         |
|            |                                                         |
|            |     > ***Analysis: Subsistence and Clothing             |
|            |     > Allowances***                                     |
|            |                                                         |
|            |     > The lender may include verified allowances in     |
|            |     > effective income. These allowances are not        |
|            |     > taxable income.                                   |
|            |                                                         |
|            |     > ***Note***: The clothing allowance generally      |
|            |     > appears on the LES as an annual amount. Convert   |
|            |     > it to a monthly amount for the loan analysis.     |
|            |                                                         |
|            |     > ***Verification: Other Military Allowances***     |
|            |                                                         |
|            | > To consider a military allowance in the underwriting  |
|            | > analysis, obtain verification of the type and amount  |
|            | > of the military allowance, and how long the applicant |
|            | > has received it.                                      |
|            |                                                         |
|            | > ***Analysis: Other Military Allowances***             |
|            |                                                         |
|            | > Examples include propay, flight or hazard pay,        |
|            | > overseas pay and combat pay.                          |
|            |                                                         |
|            | -   All of these are subject to periodic review and/or  |
|            |     testing of the recipient to determine continued     |
|            |     eligibility.                                        |
|            |                                                         |
|            | -   These types of allowances are considered taxable    |
|            |     income by the IRS, unlike housing, clothing, and    |
|            |     subsistence allowances.                             |
|            |                                                         |
|            |     > Military allowances may be included in effective  |
|            |     > income only if such income can be expected to     |
|            |     > continue because of the nature of the recipient's |
|            |     > assigned duties.                                  |
|            |                                                         |
|            | > ***Example***: Flight pay verified for a pilot. If    |
|            | > duration of the military allowance cannot be          |
|            | > determined, this source of income may still be used   |
|            | > to offset obligations of 10 to 24 months duration.    |
+------------+---------------------------------------------------------+

Continued on next page

2\. Income, Continued

+------------+---------------------------------------------------------+
| #####      | > Income derived from service in the Reserves or        |
|  l. Income | > National Guard may be included in effective income if |
|  from Serv | > the length of the applicant's total active and        |
| ice in the | > Reserve/Guard service indicates a strong probability  |
|  Reserves  | > that the Reserve/Guard income will continue.          |
| or Nationa |                                                         |
| l Guard  { | > Otherwise, this income may be used to offset          |
| #l.-income | > obligations of 10 to 24 months duration.              |
| -from-serv |                                                         |
| ice-in-the |                                                         |
| -reserves- |                                                         |
| or-nationa |                                                         |
| l-guard .u |                                                         |
| nnumbered} |                                                         |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### m    | Lenders must ask every applicant, whose income is being |
| . Recently | used to qualify for a loan, if their income is subject  |
|  Activated | to change due to participation in a Reserves/ National  |
|  Reservist | Guard unit due to activation.                           |
| s or Guard |                                                         |
|            | To accomplish this, lenders must obtain a statement,    |
|            | which affirms that an applicant's status relative to    |
|            | membership in the Reserves or National Guard, has been  |
|            | ascertained and considered. The statement should be     |
|            | made part of the origination package and should be      |
|            | submitted to VA in the event the loan is selected for   |
|            | full review.                                            |
|            |                                                         |
|            | When the answer is yes, lenders must determine what the |
|            | applicant's income may be if activated:                 |
|            |                                                         |
|            | -   **reduced**, carefully evaluate the impact the      |
|            |     reduction may have on the borrower's ability to     |
|            |     repay the loan.                                     |
|            |                                                         |
|            | -   **increased**, consider the likelihood the income   |
|            |     will continue beyond a 12 month period.             |
|            |                                                         |
|            | > *Example*: If an activated reserve/guard member       |
|            | > applies for a loan, they may present orders           |
|            | > indicating their tour of duty is not to exceed 12     |
|            | > months. Under these circumstances lenders need to     |
|            | > carefully evaluate both the present income (current   |
|            | > employment) and expected income (reservist income) in |
|            | > terms of income stability and reliability.            |
|            | >                                                       |
|            | > There are no clear-cut procedures that can be applied |
|            | > to all cases. Evaluate all aspects of each individual |
|            | > case, including credit history, accumulation of       |
|            | > assets, overall employment history, etc. and make the |
|            | > best decision for each loan regarding the use of      |
|            | > income in qualifying for the loan.                    |
+------------+---------------------------------------------------------+

Continued on next page

2\. Income, Continued

+------------+---------------------------------------------------------+
| m\.        | It is very important that loan files be carefully and   |
| Recently   | thoroughly DOCUMENTED, including any reasons for using  |
| Activated  | or not using reservist income in these situations.      |
| Reservists |                                                         |
| or Guard   | Weigh the desire to provide a veteran their benefit     |
| (          | with the responsibility to ensure the veteran will not  |
| continued) | be placed in a position of financial hardship.          |
|            |                                                         |
|            | > Lenders should contact the appropriate VA office if   |
|            | > any questions arise regarding unusual circumstances   |
|            | > regarding a mobilized servicemember's income.         |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ####       | > ***Verification***                                    |
| # n. Incom |                                                         |
| e of Recen | > Obtain verification of any of the following which     |
| tly Discha | > apply:                                                |
| rged Veter |                                                         |
| ans {#n.-i | -   employment income                                   |
| ncome-of-r |                                                         |
| ecently-di | ***Reference***: See "Income from Non-Military          |
| scharged-v | Employment" in this section for verification            |
| eterans .u | requirements.                                           |
| nnumbered} |                                                         |
|            | -   retirement income, and                              |
|            |                                                         |
|            | -   military separation payments.                       |
|            |                                                         |
|            |     > If the applicant has been employed in a position  |
|            |     > for only a short time, obtain a statement from    |
|            |     > the employer that the applicant is performing the |
|            |     > duties of the job satisfactorily and the          |
|            |     > probability of continued employment is favorable. |
|            |                                                         |
|            |     > ***Analysis: Prospects for Continued              |
|            |     > Employment***                                     |
|            |                                                         |
|            |     > Cases involving recently discharged veterans      |
|            |     > often require the underwriter to exercise a great |
|            |     > deal of flexibility and judgment in determining   |
|            |     > whether the employment income will continue in    |
|            |     > the foreseeable future. This is because some      |
|            |     > veterans may have little or no employment         |
|            |     > experience other than their military occupation.  |
|            |     > Continuity of employment is essential for a       |
|            |     > veteran with no retirement income or insufficient |
|            |     > retirement income to support the loan obligation. |
+------------+---------------------------------------------------------+

Continued on next page

2\. Income, Continued

+------------+---------------------------------------------------------+
| n\. Income | > For recently discharged veterans who have been in     |
| of         | > their new jobs only a very short time, analyze        |
| Recently   | > prospects for continued employment as follows:        |
| Discharged |                                                         |
| Veterans   | -   if the duties the applicant performed in the        |
| (          |     military are similar or directly related to the     |
| continued) |     duties of the present position, use this as one     |
|            |     indicator that the employment is likely to          |
|            |     continue.                                           |
|            |                                                         |
|            | -   if the applicant's current job requires skills for  |
|            |     which the applicant has had no training or          |
|            |     experience, greater time in the current job may be  |
|            |     needed to establish stability.                      |
|            |                                                         |
|            |     > If the applicant's retirement income, compared to |
|            |     > total estimated shelter expense, long-term debts  |
|            |     > and family living expense, is such that only      |
|            |     > minimal income from employment is necessary to    |
|            |     > qualify from the income standpoint, resolve doubt |
|            |     > in favor of the applicant.                        |
|            |                                                         |
|            |     > ***Examples***:                                   |
|            |                                                         |
|            | -   [Qualifying short-term employment]{.underline} - An |
|            |     applicant who was an airplane mechanic in the       |
|            |     military is now employed as an auto mechanic or     |
|            |     machinist.                                          |
|            |                                                         |
|            | -   [Nonqualifying short-term employment]{.underline} - |
|            |     An applicant who was an Air Force pilot is now      |
|            |     employed as an insurance salesperson on commission. |
|            |                                                         |
|            |     > Most cases fall somewhere between these extremes. |
|            |     > Fully develop the facts of each case in order to  |
|            |     > make a determination.                             |
|            |                                                         |
|            |     > Apply the guidelines under "Self-Employment       |
|            |     > Income" in this section to a recently discharged  |
|            |     > veteran who is self-employed.                     |
|            |                                                         |
|            |     > ***Analysis: Voluntary Separation Payments***     |
|            |                                                         |
|            | > Two types of voluntary separation payments are used   |
|            | > to facilitate military downsizing:                    |
|            |                                                         |
|            | > \(1\) *Special Separation Benefit (SSB)*              |
|            |                                                         |
|            | -   A one-time lump sum                                 |
|            |                                                         |
|            | -   Taxable in the year received, and                   |
|            |                                                         |
|            | -   Treat the same as any substantial cash reserve.     |
+------------+---------------------------------------------------------+

Continued on next page

2\. Income, Continued

+------------+---------------------------------------------------------+
| n\. Income | > \(2\) *Voluntary Separation Incentive (VSI)*          |
| of         |                                                         |
| Recently   | -   Annual payments                                     |
| Discharged |                                                         |
| Veterans   | -   Taxable in the year received                        |
| (          |                                                         |
| continued) | -   Include in effective income                         |
|            |                                                         |
|            | -   Calculated by multiplying the veteran's years of    |
|            |     service times two                                   |
|            |                                                         |
|            | -   Requires a minimum of six years service (equates to |
|            |     a minimum of 12 years annual payments).             |
|            |                                                         |
|            |     > If the veteran receives both VSI and VA           |
|            |     > disability compensation payments, the VSI is      |
|            |     > reduced by the amount of disability compensation. |
|            |     > However, if the disability compensation is        |
|            |     > related to an earlier period of service and the   |
|            |     > VSI a later period of service, the VSI is **not** |
|            |     > reduced by the amount of disability compensation. |
|            |                                                         |
|            | > VSI is reduced by the amount of any base pay or       |
|            | > compensation a member receives for active or reserve  |
|            | > service, including inactive duty training.            |
|            | >                                                       |
|            | > The veteran can designate a beneficiary for VSI       |
|            | > payments in the event of death.                       |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ####       | > ***Verification: Multi-Unit Property Securing the VA  |
| # o. Renta | > Loan***                                               |
| l Income { |                                                         |
| #o.-rental | > Verify:                                               |
| -income .u |                                                         |
| nnumbered} | -   cash reserves totaling at least six months mortgage |
|            |     payments (principal, interest, taxes, and           |
|            |     insurance - PITI), and                              |
|            |                                                         |
|            | -   documentation of the applicant's prior experience   |
|            |     managing rental units or other background involving |
|            |     both property maintenance and rental.               |
|            |                                                         |
|            |     > ***Analysis: Multi-Unit Property Securing the VA  |
|            |     > Loan***                                           |
|            |                                                         |
|            |     > Include the prospective rental income in          |
|            |     > effective income only if:                         |
|            |                                                         |
|            | -   evidence indicates the applicant has a reasonable   |
|            |     likelihood of success as a landlord, and            |
|            |                                                         |
|            | ```{=html}                                              |
|            | <!-- -->                                                |
|            | ```                                                     |
|            | -   cash reserves totaling at least six months mortgage |
|            |     > payments are available.                           |
|            |                                                         |
|            |     > The amount of rental income to include in         |
|            |     > effective income is based on 75 percent of:       |
|            |                                                         |
|            | ```{=html}                                              |
|            | <!-- -->                                                |
|            | ```                                                     |
|            | -   verified prior rent collected on the units          |
|            |     (existing property), or                             |
|            |                                                         |
|            | -   the appraiser's opinion of the property's fair      |
|            |     monthly rental (proposed construction).             |
+------------+---------------------------------------------------------+

Continued on next page

2\. Income, Continued

+------------+---------------------------------------------------------+
| o\. Rental | > ***Note***: A percentage greater than 75 percent may  |
| Income     | > be used if the basis for such percentage is           |
| (          | > adequately documented.                                |
| continued) |                                                         |
|            | > ***Verification: Rental of the Property Applicant     |
|            | > Occupied Prior to the New Loan***                     |
|            |                                                         |
|            | > Obtain a copy of the rental agreement on the          |
|            | > property, if any.                                     |
|            |                                                         |
|            | > ***Analysis: Rental of the Property Applicant         |
|            | > Occupied Prior to the New Loan***                     |
|            |                                                         |
|            | > Use the prospective rental income only to offset the  |
|            | > mortgage payment on the rental property and only if   |
|            | > there is no indication that the property will be      |
|            | > difficult to rent. This rental income may **not** be  |
|            | > included in effective income.                         |
|            |                                                         |
|            | > Obtain a working knowledge of the local rental        |
|            | > market. If there is no lease on the property, but the |
|            | > local rental market is very strong, the lender may    |
|            | > still consider the prospective rental income for      |
|            | > offset purposes.                                      |
|            |                                                         |
|            | > ***Verification: Rental of Other Property Not         |
|            | > Securing the VA Loan***                               |
|            |                                                         |
|            | > Obtain the following:                                 |
|            |                                                         |
|            | -   documentation of cash reserves totaling at least    |
|            |     three months mortgage payments (principal,          |
|            |     interest, taxes, and insurance - PITI), and         |
|            |                                                         |
|            | -   individual income tax returns, signed and dated,    |
|            |     plus all applicable schedules for the previous two  |
|            |     years, which show rental income generated by the    |
|            |     property.                                           |
|            |                                                         |
|            | > ***Analysis: Rental of Other Property Not Securing    |
|            | > the VA Loan***                                        |
|            | >                                                       |
|            | > Rental income verified as stable and reliable may be  |
|            | > included in effective income. If there is little or   |
|            | > no prior rental history on the property, make a       |
|            | > determination based on review of:                     |
|            |                                                         |
|            | -   documentation of the applicant's prior experience   |
|            |     managing rental units or other background involving |
|            |     both property maintenance and rental                |
|            |                                                         |
|            | -   any leases on the property, and                     |
|            |                                                         |
|            | -   the strength of the local rental market.            |
|            |                                                         |
|            | Property depreciation claimed as a deduction on the tax |
|            | returns may be included in effective income.            |
+------------+---------------------------------------------------------+

Continued on next page

2\. Income, Continued

+------------+---------------------------------------------------------+
| ##         | > See "ECOA Considerations" in this section.            |
| ### p. Ali |                                                         |
| mony, Chil | > Verify the income if the applicant wants it to be     |
| d Support, | > considered. The payments must be likely to continue   |
|  and Maint | > in order to include them in effective income.         |
| enance Pay |                                                         |
| ments {#p. | > Factors used to determine whether the payments will   |
| -alimony-c | > continue include, but are not limited to:             |
| hild-suppo |                                                         |
| rt-and-mai | -   whether the payments are received pursuant to a     |
| ntenance-p |     written agreement or court decree                   |
| ayments .u |                                                         |
| nnumbered} | -   the length of time the payments have been received  |
|            |                                                         |
|            | -   the regularity of receipt, and                      |
|            |                                                         |
|            | -   the availability of procedures to compel payment.   |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##         | > Generally, automobile allowances are paid to cover    |
| ### q. Aut | > specific expenses related to an applicant's           |
| omobile or | > employment, and it is appropriate to use such income  |
|  Similar A | > to offset a corresponding car payment.                |
| llowances  |                                                         |
| {#q.-autom | > However, in some instances, such an allowance may     |
| obile-or-s | > exceed the car payment. With proper documentation,    |
| imilar-all | > income from a car allowance which exceeds the car     |
| owances .u | > payment can be counted as effective income. Likewise, |
| nnumbered} | > any other similar type of allowance which exceeds the |
|            | > specific expenses involved may be added to gross      |
|            | > income to the extent it is documented to exceed the   |
|            | > actual expense.                                       |
+------------+---------------------------------------------------------+

Continued on next page

2\. Income, Continued

+------------+---------------------------------------------------------+
| ##### r. O | > If it is reasonable to conclude that other types of   |
| ther Types | > income will continue in the foreseeable future,       |
|  of Income | > include it in effective income. Otherwise, consider   |
|  {#r.-othe | > whether it is reasonable to use the income to offset  |
| r-types-of | > obligations of 10 to 24 months duration.              |
| -income .u |                                                         |
| nnumbered} | > "Other" types of income which may be considered as    |
|            | > effective income include, but are not limited to:     |
|            |                                                         |
|            | -   pension or other retirement benefits                |
|            |                                                         |
|            | -   disability income                                   |
|            |                                                         |
|            | -   dividends from stocks                               |
|            |                                                         |
|            | -   interest from bonds, savings accounts, and so on,   |
|            |     and                                                 |
|            |                                                         |
|            | -   royalties.                                          |
|            |                                                         |
|            |     > The lender may include verified income from       |
|            |     > public assistance programs in effective income if |
|            |     > evidence indicates it will probably continue for  |
|            |     > three years or more.                              |
|            |                                                         |
|            |     > The lender may include verified workers'          |
|            |     > compensation income that will continue in the     |
|            |     > foreseeable future, if the veteran chooses to     |
|            |     > reveal it.                                        |
|            |                                                         |
|            |     > The lender may include verified income received   |
|            |     > specifically for the care of any foster           |
|            |     > child(ren). Generally, foster care income is to   |
|            |     > be used only to balance the expenses of caring    |
|            |     > for the foster child(ren) against any increased   |
|            |     > residual income requirements.                     |
|            |                                                         |
|            |     > Do **not** include temporary income items such as |
|            |     > VA educational allowances and unemployment        |
|            |     > compensation in effective income.                 |
|            |                                                         |
|            |     > ***Exception***:                                  |
|            |                                                         |
|            |     > If unemployment compensation is a regular part of |
|            |     > the applicant's income due to the nature of his   |
|            |     > or her employment (for example, seasonal work),   |
|            |     > it may be included.                               |
+------------+---------------------------------------------------------+

#### 3. Income Taxes and Other Deductions from Income {#income-taxes-and-other-deductions-from-income .unnumbered}

+------------+---------------------------------------------------------+
| ##### C    | > September 15, 2004, Change 4                          |
| hange Date |                                                         |
|            | This section has been changed to create subsection      |
|            | lettering.                                              |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### a. I | > Determine the appropriate deductions for Federal      |
| ncome Tax  | > income tax and Social Security using the "Employer's  |
| and Social | > Tax Guide," Circular E, issued by the Internal        |
|  Security  | > Revenue Service.                                      |
| Deductions |                                                         |
|  {#a.-inco | > Determine the appropriate deductions for state and    |
| me-tax-and | > local taxes using similar materials provided by the   |
| -social-se | > states.                                               |
| curity-ded |                                                         |
| uctions .u | > The lender may consider the applicant's potential tax |
| nnumbered} | > benefits from obtaining the loan (for example,        |
|            | > mortgage interest deduction) in the analysis. To do   |
|            | > so:                                                   |
|            |                                                         |
|            | -   determine what the applicant's withholding          |
|            |     allowances will be, using the instructions and      |
|            |     worksheet portion of IRS Form W-4, Employee's       |
|            |     Withholding Allowance Certificate, and              |
|            |                                                         |
|            | -   apply that withholding number when calculating      |
|            |     Federal and state income tax deductions.            |
+------------+---------------------------------------------------------+

Continued on next page

3\. Income Taxes and Other Deductions from Income, Continued

+------------+---------------------------------------------------------+
| ##         | > Mortgage Credit Certificates (MCCs) issued by state   |
| ### b. Inc | > and local governments may qualify a borrower for a    |
| ome Tax Cr | > Federal tax credit. The Federal tax credit is based   |
| edits from | > on a certain percentage of the borrower's mortgage    |
|  Mortgage  | > interest payment.                                     |
| Credit Cer |                                                         |
| tificates  | > Lenders must provide a copy of the MCC to VA with the |
| {#b.-incom | > loan package which indicates:                         |
| e-tax-cred |                                                         |
| its-from-m | -   the percentage to be used to calculate the tax      |
| ortgage-cr |     credit, and                                         |
| edit-certi |                                                         |
| ficates .u | -   the amount of the certified indebtedness. The       |
| nnumbered} |     certified indebtedness can be comprised of a loan   |
|            |     incurred by the veteran to acquire a principal      |
|            |     residence or a qualified home improvement or        |
|            |     rehabilitation loan.                                |
|            |                                                         |
|            |     > If the percentage on the MCC is more than 20      |
|            |     > percent, there is an annual limit on the tax      |
|            |     > credit equal to the lesser of \$2,000 or the      |
|            |     > borrower's maximum tax liability. Calculate the   |
|            |     > tax credit by applying the specified percentage   |
|            |     > to the interest paid on the certified             |
|            |     > indebtedness. Then apply the annual limit.        |
|            |                                                         |
|            |     > ***Example***: The MCC shows a 30 percent rate    |
|            |     > and \$100,000 certified indebtedness. The         |
|            |     > borrower will pay approximately \$8,000 in annual |
|            |     > mortgage interest. Borrower's estimated total     |
|            |     > Federal income tax liability is \$9,000.          |
|            |     > Calculate the tax credit as follows:              |
|            |                                                         |
|            | -   30 percent of \$8,000 = \$2,400                     |
|            |                                                         |
|            | -   Apply the annual \$2,000 limit                      |
|            |                                                         |
|            | -   The tax credit will be \$2,000                      |
|            |                                                         |
|            | -   Use \$167 (one-twelfth of \$2,000) in the monthly   |
|            |     analysis.                                           |
|            |                                                         |
|            |     > ***Note***: If the mortgage on which the borrower |
|            |     > pays interest is greater than the amount of       |
|            |     > certified indebtedness, limit the interest used   |
|            |     > in the tax credit calculation to that portion     |
|            |     > attributable to the certified indebtedness.       |
+------------+---------------------------------------------------------+

#### 4. Assets {#assets .unnumbered}

+------------+---------------------------------------------------------+
| ##### C    | > September 15, 2004, Change 4                          |
| hange date | >                                                       |
|            | > This section has been changed to create subsection    |
|            | > lettering.                                            |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ####       | > The applicant or spouse must have sufficient cash to  |
| # a. Amoun | > cover:                                                |
| t of Cash  |                                                         |
| Required { | -   any closing costs or points which are the           |
| #a.-amount |     applicant's responsibility and are not financed in  |
| -of-cash-r |     the loan                                            |
| equired .u |                                                         |
| nnumbered} | -   the down payment, if a Graduated Payment Mortgage,  |
|            |     and                                                 |
|            |                                                         |
|            | -   the difference between the sales price and the loan |
|            |     amount, if the sales price exceeds the reasonable   |
|            |     value established by VA.                            |
|            |                                                         |
|            |     > VA does **not** require the applicant to have     |
|            |     > additional cash to cover a certain number of      |
|            |     > mortgage payments, unplanned expenses, or other   |
|            |     > contingencies.                                    |
|            |                                                         |
|            |     > However, the applicant's ability to accumulate    |
|            |     > liquid assets and the current availability of     |
|            |     > liquid assets for unplanned expenses should be    |
|            |     > considered in the overall credit analysis.        |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| #####      | > Verify all liquid assets owned by the applicant or    |
| b. Verific | > spouse to the extent they are needed to close the     |
| ation Requ | > loan. In addition, verify any liquid assets that may  |
| irement {# | > have a bearing on the overall credit analysis; that   |
| b.-verific | > is, significant assets.                               |
| ation-requ |                                                         |
| irement .u | -   Use [VA Form                                        |
| nnumbered} |     26                                                  |
|            | -8497a](http://www.vba.va.gov/pubs/forms/26-8497a.pdf), |
|            |     Request for Verification of Deposit, as             |
|            |     appropriate, **OR**                                 |
|            |                                                         |
|            | -   original or certified true copies of the            |
|            |     applicant's last two bank statements, **OR**        |
|            |                                                         |
|            | -   the borrower's bank statements available to them by |
|            |     Internet or faxed from the depository directly to   |
|            |     the lender. In cases where the lending institution  |
|            |     uses Internet based verifications, ensure the URL   |
|            |     appears on the document.                            |
|            |                                                         |
|            | -   Verifications must be no more than 120 days old     |
|            |     (180 days for new construction).                    |
|            |                                                         |
|            | -   For automatically closed loans, this means the date |
|            |     of the deposit verification is within 120 days of   |
|            |     the date the note is signed (180 days for new       |
|            |     construction).                                      |
+------------+---------------------------------------------------------+

Continued on next page

4\. Assets, Continued

+------------+---------------------------------------------------------+
| b\.        | > For prior approval loans, this means the date of the  |
| Ve         | > deposit verification is within 120 days of the date   |
| rification | > the application is received by VA (180 days for new   |
| R          | > construction).                                        |
| equirement |                                                         |
| (          |                                                         |
| continued) |                                                         |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##         | > In some cases, the determination that the income      |
| ### c. Pen | > and/or assets of a veteran are sufficient to qualify  |
| ding Sale  | > for the loan depends upon the consummation of the     |
| of Real Es | > sale of presently owned real property.                |
| tate {#c.- |                                                         |
| pending-sa | -   Sales proceeds may be necessary to make a down      |
| le-of-real |     payment or pay closing costs on the VA loan.        |
| -estate .u |                                                         |
| nnumbered} | -   In addition, the lender may want to consider the    |
|            |     amount of equity the applicant has accumulated in   |
|            |     the property and the extent to which that equity is |
|            |     attributable to the applicant's investment rather   |
|            |     than the housing market, in evaluating the          |
|            |     applicant's ability to manage assets.               |
|            |                                                         |
|            |     > The lender may consider any down payment or costs |
|            |     > on the VA loan as provided for by the sale of the |
|            |     > property if available information provides a      |
|            |     > reasonable basis for concluding the equity to be  |
|            |     > realized from the sale will be sufficient for     |
|            |     > this purpose.                                     |
|            |                                                         |
|            |     > ***References***:                                 |
|            |                                                         |
|            | -   See [section 4 of chapter                           |
|            |     5](http://                                          |
|            | www.warms.vba.va.gov/admin26/pamphlet/pam26_7/ch05.doc) |
|            |     for prior approval loans which depend upon the sale |
|            |     of property for the borrower to qualify.            |
|            |                                                         |
|            | -   See [section 6 of chapter                           |
|            |     5](http://                                          |
|            | www.warms.vba.va.gov/admin26/pamphlet/pam26_7/ch05.doc) |
|            |     for required loan closing documents.                |
+------------+---------------------------------------------------------+

#### 5. Debts and Obligations {#debts-and-obligations .unnumbered}

+------------+---------------------------------------------------------+
| ##### C    | > September 15, 2004, Change 4                          |
| hange Date | >                                                       |
|            | > This section has been changed to create subsection    |
|            | > lettering.                                            |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##         | > Significant debts and obligations of the applicant    |
| ### a. Ver | > must be verified and rated.                           |
| ification  |                                                         |
| {#a.-verif | > Obtain a credit report.                               |
| ication .u |                                                         |
| nnumbered} | > ***Reference***: See section 7 of this chapter for    |
|            | > details on the type of credit report required.        |
|            |                                                         |
|            | > For obligations not included on the credit report     |
|            | > which are revealed on the application or through      |
|            | > other means, the lender must obtain a verification of |
|            | > deposit showing the obligation or other written       |
|            | > verification directly from the creditor. The lender   |
|            | > 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, the lender must investigate   |
|            | > the nature of the allotment to determine whether the  |
|            | > allotment is related to a debt.                       |
|            |                                                         |
|            | > For obligations that have not been rated on the       |
|            | > credit report or elsewhere, obtain the verification   |
|            | > and rating directly from the creditor. Include a      |
|            | > written explanation for any obligation that is not    |
|            | > rated.                                                |
|            |                                                         |
|            | > 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.                                           |
+------------+---------------------------------------------------------+

Continued on next page

5\. Debts and Obligations, Continued

+------------+---------------------------------------------------------+
| ####       | > Credit reports and verifications must be no more than |
| # a. Verif | > 120 days old (180 days for new construction).         |
| ication (c |                                                         |
| ontinued)  | -   For automatically closed loans, this means the date |
| {#a.-verif |     of the credit report or verification is within 120  |
| ication-co |     days of the date the note is signed (180 days for   |
| ntinued .u |     new construction).                                  |
| nnumbered} |                                                         |
|            | -   For prior approval loans, this means the date of    |
|            |     the credit report or verification is within 120     |
|            |     days of the date the application is received by VA  |
|            |     (180 days for new construction).                    |
|            |                                                         |
|            |     > 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                              |
|            |                                                         |
|            | -   in community property states.                       |
|            |                                                         |
|            | -   -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 and spouse choose to have the         |
|            |     spouse's income considered).                        |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| #####      | > The payment amount on any alimony and/or child        |
|  b. Verifi | > support obligation of the applicant **must** be       |
| cation of  | > verified.                                             |
| Alimony an |                                                         |
| d Child Su | > Do **not** request documentation of an applicant's    |
| pport Obli | > divorce unless it is necessary to verify the amount   |
| gations  { | > of any alimony or child support liability indicated   |
| #b.-verifi | > by the applicant. If, however, in the routine course  |
| cation-of- | > of processing the loan, the lender encounters direct  |
| alimony-an | > evidence (such as, in the credit report) that a child |
| d-child-su | > support or alimony obligation exists, make any        |
| pport-obli | > inquiries necessary to resolve discrepancies and      |
| gations .u | > obtain the appropriate verification.                  |
| nnumbered} |                                                         |
+------------+---------------------------------------------------------+

Continued on next page

5\. Debts and Obligations, Continued

+------------+---------------------------------------------------------+
| ####       | > Deduct significant debts and obligations from total   |
| # c. Analy | > effective income when determining ability to meet the |
| sis of Deb | > mortgage payments. Significant debts and obligations  |
| ts and Obl | > include:                                              |
| igations { |                                                         |
| #c.-analys | -   debts and obligations with a remaining term of ten  |
| is-of-debt |     months or more; that is, long-term obligations, and |
| s-and-obli |                                                         |
| gations .u | -   accounts with a term less than ten months that      |
| nnumbered} |     require payments so large as to cause a severe      |
|            |     impact on the family's resources for any period of  |
|            |     time.                                               |
|            |                                                         |
|            |     > ***Example***: Monthly payments of \$300 on an    |
|            |     > auto loan with a remaining balance of \$1,500,    |
|            |     > even though it should be paid out in five months, |
|            |     > would be considered significant. The payment      |
|            |     > amount is so large as to cause a severe impact on |
|            |     > the family's resources during the first, most     |
|            |     > critical, months of the home loan.                |
|            |                                                         |
|            |     > Determine whether debts and obligations which do  |
|            |     > **not** fit the description of "significant"      |
|            |     > should be given any weight in the analysis. They  |
|            |     > may have an impact on the applicant's ability to  |
|            |     > provide for family living expenses.               |
|            |                                                         |
|            |     > 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.                             |
|            |                                                         |
|            |     > Debts assigned to an ex-spouse by a divorce       |
|            |     > decree will not generally be charged against a    |
|            |     > veteran-borrower. This includes debts that are    |
|            |     > now delinquent.                                   |
+------------+---------------------------------------------------------+

Continued on next page

5\. Debts and Obligations, Continued

+------------+---------------------------------------------------------+
| ##### d.   | > The applicant may have a contingent liability based   |
| Applicant  | > on co-signing a loan. If:                             |
| as Co-obli |                                                         |
| gor on Ano | -   there is evidence that the loan payments are being  |
| ther's Loa |     made by someone else, and                           |
| n {#d.-app |                                                         |
| licant-as- | -   there is no reason to believe that the applicant    |
| co-obligor |     will have to participate in repayment of the loan,  |
| -on-anothe |     then                                                |
| rs-loan .u |                                                         |
| nnumbered} | -   the lender may exclude the loan payments from the   |
|            |     monthly obligations factored into the net effective |
|            |     income calculation in the loan analysis.            |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##         | > In some cases, the determination that the income      |
| ### e. Pen | > and/or assets of a veteran are sufficient to qualify  |
| ding Sale  | > for the loan depends upon the consummation of the     |
| of Real Es | > sale of presently owned real property. Sales proceeds |
| tate {#e.- | > may be necessary to                                   |
| pending-sa |                                                         |
| le-of-real | -   clear the outstanding mortgage(s) against the       |
| -estate .u |     property                                            |
| nnumbered} |                                                         |
|            | -   pay off outstanding consumer obligations, and/or    |
|            |                                                         |
|            | -   make a down payment or pay closing costs on the VA  |
|            |     loan.                                               |
|            |                                                         |
|            |     > Alternatively, the veteran may intend to sell the |
|            |     > property with the buyer assuming the outstanding  |
|            |     > mortgage obligation.                              |
|            |                                                         |
|            |     > The lender may disregard the payments on the      |
|            |     > outstanding mortgage(s) and any consumer          |
|            |     > obligations which the veteran intends to clear if |
|            |     > available information provides a reasonable basis |
|            |     > for concluding the equity to be realized from the |
|            |     > sale will be sufficient for this purpose.         |
|            |                                                         |
|            |     > ***References***:                                 |
|            |                                                         |
|            | -   See [section 4 of chapter                           |
|            |     5](http://                                          |
|            | www.warms.vba.va.gov/admin26/pamphlet/pam26_7/ch05.doc) |
|            |     for prior approval loans dependent upon the sale of |
|            |     property for the borrower to qualify.               |
|            |                                                         |
|            | -   See [section 6 of chapter                           |
|            |     5](http://                                          |
|            | www.warms.vba.va.gov/admin26/pamphlet/pam26_7/ch05.doc) |
|            |     for required loan closing documents.                |
+------------+---------------------------------------------------------+

Continued on next page

5\. Debts and Obligations, Continued

+------------+---------------------------------------------------------+
| #####      | > If the applicant plans to obtain a second mortgage    |
| f. Seconda | > simultaneously with the VA-guaranteed loan include    |
| ry Borrowi | > the second mortgage payment as a significant debt.    |
| ng {#f.-se |                                                         |
| condary-bo | ***Reference***: See [section 4 of chapter              |
| rrowing .u | 9](http://                                              |
| nnumbered} | www.warms.vba.va.gov/admin26/pamphlet/pam26_7/ch09.doc) |
|            | for VA limitations on secondary borrowing.              |
|            |                                                         |
|            | > From an underwriting standpoint, the veteran must     |
|            | > **not** be placed in a substantially worse position   |
|            | > than if the entire amount borrowed had been           |
|            | > guaranteed by VA.                                     |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### g.   | > If student loan repayments are scheduled to begin     |
| Deferred S | > within 12 months of the date of VA loan closing,      |
| tudent Loa | > lenders should consider the anticipated monthly       |
| n Payments | > obligation in the loan analysis. If the borrower is   |
|            | > able to provide evidence that the debt may be         |
|            | > deferred for a period outside that timeframe, the     |
|            | > debt need not be considered in the analysis.          |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| #          | > Certain types of loans secured against deposited      |
| #### h. Lo | > funds (signature loans, cash value life insurance     |
| ans Secure | > policies, 401K loans, etc...) in which repayment may  |
| d By Depos | > be obtained through extinguishing the asset, do not   |
| ited Funds | > require repayment consideration for loan              |
|            | > qualification.                                        |
|            | >                                                       |
|            | > ***Note***: Assets securing these loans may not be    |
|            | > included as an asset in the loan analysis.            |
+------------+---------------------------------------------------------+

#### 6. Required Search for and Treatment of Debts Owed to the Federal Government {#required-search-for-and-treatment-of-debts-owed-to-the-federal-government .unnumbered}

+------------+---------------------------------------------------------+
| ##### C    | > July 20, 2007, Change 5                               |
| hange Date |                                                         |
|            | -   Subsection c has been changed to add the Federal    |
|            |     Deposit Insurance Corporation (FDIC).               |
|            |                                                         |
|            | -   Subsection e has been changed to remove step 4 from |
|            |     the CAIVRS screening process.                       |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##         | > There are two separate procedures the lender must     |
| ### a. The | > follow. Both should be initiated immediately upon     |
|  Search Re | > receipt of a loan application to avoid delays in      |
| quirement  | > closing the loan.                                     |
| {#a.-the-s |                                                         |
| earch-requ | > \(1\) Ask the veteran and any veteran co-obligors     |
| irement .u | > (including spouse if a veteran) if he or she:         |
| nnumbered} |                                                         |
|            | -   is receiving VA disability benefits                 |
|            |                                                         |
|            | -   would be entitled to receive VA disability benefits |
|            |     but for the receipt of retired pay                  |
|            |                                                         |
|            | -   has received VA disability benefits in the past, or |
|            |                                                         |
|            | -   is an unmarried surviving spouse of a veteran who   |
|            |     died on active duty or as a result of a             |
|            |     service-connected disability.                       |
|            |                                                         |
|            |     > If the veteran falls under one of the above       |
|            |     > categories, follow the procedures discussed under |
|            |     > subsection b "Debt Related to VA Benefits" of     |
|            |     > this section.                                     |
|            |                                                         |
|            |     > \(2\) For all applicants and co-obligors (veteran |
|            |     > or nonveteran) on all VA loans including Interest |
|            |     > Rate Reduction Refinancing Loans (IRRRLs),        |
|            |     > perform a Credit Alert Interactive Voice Response |
|            |     > System                                            |
|            |     > ([CAIVRS](htt                                     |
|            | p://www.hud.gov/offices/hsg/sfh/sys/caivrs/caivrs.cfm)) |
|            |     > inquiry.                                          |
|            |                                                         |
|            | > ***Reference***: See                                  |
|            | > "[CAIVRS](ht                                          |
|            | tp://www.hud.gov/offices/hsg/sfh/sys/caivrs/caivrs.cfm) |
|            | > Procedures" in this section.                          |
+------------+---------------------------------------------------------+

Continued on next page

6\. Required Search for and Treatment of Debts Owed to the Federal
Government, Continued

+------------+---------------------------------------------------------+
| ##         | > Before processing a loan involving certain veterans,  |
| ### b. Deb | > as described in section                               |
| t Related  | >                                                       |
| to VA Bene | > a (1) "The Search Requirement," the lender must       |
| fits {#b.- | > submit [VA Form                                       |
| debt-relat | >                                                       |
| ed-to-va-b | 26-8937](http://www.vba.va.gov/pubs/forms/26-8937.pdf), |
| enefits .u | > Verification of VA Benefits, to the VA office where   |
| nnumbered} | > the loan application and/or closed loan package will  |
|            | > be sent. VA will complete and return the form to the  |
|            | > lender.                                               |
|            | >                                                       |
|            | > The loan cannot be submitted for prior approval or    |
|            | > approved under the automatic procedure until the      |
|            | > lender obtains the completed form from VA. The lender |
|            | > must maintain the completed form with the loan        |
|            | > package.                                              |
|            | >                                                       |
|            | > If the form indicates that the applicant receives a   |
|            | > nonservice-connected pension or has been rated        |
|            | > incompetent by VA, the loan cannot be closed          |
|            | > automatically. Submit the loan for prior approval.    |
|            | >                                                       |
|            | > If the form indicates that the applicant has any of   |
|            | > the following:                                        |
|            |                                                         |
|            | -   an outstanding indebtedness of overpaid education,  |
|            |     compensation, or pension benefits                   |
|            |                                                         |
|            | -   an education or direct home loan in default         |
|            |                                                         |
|            | -   an outstanding indebtedness resulting from payment  |
|            |     of a claim on a prior guaranteed home loan          |
|            |                                                         |
|            | -   a repayment plan for any of these debts that is not |
|            |     current, then one of the following must accompany   |
|            |     the loan package:                                   |
|            |                                                         |
|            | ```{=html}                                              |
|            | <!-- -->                                                |
|            | ```                                                     |
|            | -   evidence of payment in full of the debt, or         |
|            |                                                         |
|            | -   evidence of a current repayment plan acceptable to  |
|            |     VA and evidence that the veteran executed a         |
|            |     promissory note for the entire debt balance.        |
|            |                                                         |
|            | > ***Note***: No promissory note is required in cases   |
|            | > referred to the Department of Justice, General        |
|            | > Accounting Office, or VA Regional Counsel for         |
|            | > judicial enforcement. In such cases, VA will obtain   |
|            | > information on the applicant's debt status from these |
|            | > parties and relay pertinent information to the        |
|            | > lender.                                               |
+------------+---------------------------------------------------------+

Continued on next page

6\. Required Search for and Treatment of Debts Owed to the Federal
Government, Continued

+------------+---------------------------------------------------------+
| b\. Debt   | > VA may find a repayment plan acceptable if:           |
| Related to |                                                         |
| VA         | -   the veteran has been satisfactorily making payments |
| Benefits   |     on a repayment plan in effect prior to the lender's |
| (          |     inquiry                                             |
| continued) |                                                         |
|            | -   the veteran's overall credit history and            |
|            |     anticipated financial capacity after the proposed   |
|            |     loan is made indicate a reasonable likelihood that  |
|            |     the repayment plan will be honored and the          |
|            |     outstanding amount of indebtedness is not so large  |
|            |     that it would prevent payment in full within a      |
|            |     reasonable period (approximately one year), or      |
|            |                                                         |
|            | -   the case involves unusually meritorious             |
|            |     circumstances.                                      |
|            |                                                         |
|            |     > ***Example***:                                    |
|            |                                                         |
|            | -   Consideration would be given to a veteran with an   |
|            |     outstanding credit history and adequate income      |
|            |     whose debt balance is too large to be reasonably    |
|            |     paid out in less than 18 months to two years.       |
|            |                                                         |
|            | -   VA will offer special consideration to a veteran's  |
|            |     claim that he or she was not previously aware of an |
|            |     overpayment of benefits.                            |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### c    | > [CAIVRS](ht                                           |
| . What is  | tp://www.hud.gov/offices/hsg/sfh/sys/caivrs/caivrs.cfm) |
| [CAIVRS](h | > is a HUD-maintained computer information system which |
| ttp://www. | > enables participating lenders to learn when an        |
| hud.gov/of | > applicant has previously defaulted on a               |
| fices/hsg/ | > federally-assisted loan. The system's interactive     |
| sfh/sys/ca | > voice response function provides instant credit       |
| ivrs/caivr | > information.                                          |
| s.cfm)? {# |                                                         |
| c.-what-is | > The database includes default information from the    |
| -caivrs .u | > [Department of Agriculture](http://www.usda.gov/),    |
| nnumbered} | > [Department of                                        |
|            | > Education](http://www.ed.gov/index.jhtml),            |
|            | > [Department of Justice](http://www.usdoj.gov/),       |
|            | > [HUD](http://www.hud.gov/), [Small Business           |
|            | > Administration](http://www.sba.gov/), [Federal        |
|            | > Deposit Insurance Corporation](http://www.fdic.gov/), |
|            | > and [VA](http://www.va.gov/).                         |
|            |                                                         |
|            | > The VA default information included in the database   |
|            | > relates to:                                           |
|            |                                                         |
|            | -   overpayments on education cases                     |
|            |                                                         |
|            | -   overpayments on disability benefits income, and     |
|            |                                                         |
|            | -   claims paid due to home loan foreclosures.          |
+------------+---------------------------------------------------------+

Continued on next page

6\. Required Search for and Treatment of Debts Owed to the Federal
Government, Continued

+------------+---------------------------------------------------------+
| ##         | > VA assigns an 11-digit VA lender ID number to each    |
| ### d. CAI | > new lender (See [section 12 of chapter                |
| VRS Proced | > 1](http://ww                                          |
| ures {#d.- | w.warms.vba.va.gov/admin26/pamphlet/pam26_7/ch01.doc)), |
| caivrs-pro | > then automatically forwards the ID number to HUD with |
| cedures .u | > a request to grant the lender CAIVRS access. The      |
| nnumbered} | > lender can begin accessing CAIVRS within several      |
|            | > weeks of its VA ID number assignment.                 |
|            |                                                         |
|            | > Perform a CAIVRS screening on each applicant and any  |
|            | > co-obligor immediately upon receipt of a loan         |
|            | > application. This includes IRRRL applicants.          |
|            | > Step-by-step instructions follow. HUD also offers     |
|            | > on-line access to CAIVRS. For details, contact HUD or |
|            | > go to                                                 |
|            | > <htt                                                  |
|            | p://www.hud.gov/offices/hsg/sfh/sys/caivrs/caivrs.cfm>. |
+------------+---------------------------------------------------------+

+------+---------------------------------------------------------------+
| Step | Action                                                        |
+------+---------------------------------------------------------------+
| 1    | Call CAIVRS using a touch-tone telephone. Dial (301) 344-4000 |
|      |                                                               |
|      | Monday through Saturday 8:00 a.m. to 8:00 p.m. Eastern Time.  |
+------+---------------------------------------------------------------+
| 2    | -   You will hear, "Welcome to the HUD Voice Response System. |
|      |     To access the Credit Alert System, press 1. To access the |
|      |     Line of Credit Control System, press 2. If you have       |
|      |     completed your call, press Zero. Thank you."              |
|      |                                                               |
|      | -   Enter 1.                                                  |
+------+---------------------------------------------------------------+
| 3    | You will hear, "You have reached the HUD Credit Alert System. |
|      | Please enter your credit alert access code and then press #." |
|      |                                                               |
|      | -   Enter the first 10 digits of your VA lender ID number,    |
|      |     then the "#" sign.                                        |
|      |                                                               |
|      | CAIVRS will only allow 1 second attempt to enter an access    |
|      | code. The session is terminated if the second attempt fails.  |
+------+---------------------------------------------------------------+
| 4    | If the lender is authorized to process more than one loan     |
|      | type, you will hear a menu. "If you are processing a HUD      |
|      | Title I loan, press 1, or if you are processing a FHA Single  |
|      | Family mortgage loan, press 2, or if you are processing a HUD |
|      | 312 LPA, press 3, or if you are processing a Veterans Affairs |
|      | loan, press 4, or if you are\...(and so on),..then press #."  |
|      |                                                               |
|      | -   Enter 4, then "**\#**".                                   |
+------+---------------------------------------------------------------+
| 5    | You will hear, "Please now enter applicant's Social Security  |
|      | Number and then press \* OR the Tax Identification Number and |
|      | then press #."                                                |
|      |                                                               |
|      | -   Enter the appropriate number and symbol.                  |
+------+---------------------------------------------------------------+

Continued on next page

6\. Required Search for and Treatment of Debts Owed to the Federal
Government, Continued

  -----------------------------------------------------------------------
  d\. CAIVRS Procedures (continued)

  -----------------------------------------------------------------------

+------+---------------------------------------------------------------+
| Step | Action                                                        |
+------+---------------------------------------------------------------+
| 6    | You will hear, "You have entered Social Security Number       |
|      | \-\-\-\--(repeat number entered) or Tax Identification Number |
|      | \-\-\-\--. Please enter 'Y' if this is correct, or 'N' if not |
|      | correct."                                                     |
|      |                                                               |
|      | -   Enter "Y" if correct.                                     |
|      |                                                               |
|      | -   If incorrect, enter "N" and repeat Step 5.                |
+------+---------------------------------------------------------------+
| 7    | > If there is no match, you will hear, "There are no claims,  |
|      | > foreclosures, or defaults for this borrower."               |
|      | >                                                             |
|      | > If there is a match, you will hear a message reciting:      |
|      |                                                               |
|      | -   The type of match (For example, "There is a foreclosure   |
|      |     on this borrower.")                                       |
|      |                                                               |
|      | -   The case number (For example, "VA default \-\-\-\-- ")    |
|      |                                                               |
|      | -   The point of contact referral message ("For information,  |
|      |     please call area code \-\-- \-\-- \-\-\-- ").             |
|      |                                                               |
|      | > Copy down all pertinent information provided.               |
+------+---------------------------------------------------------------+
| 8    | You will hear, "Credit Alert Confirmation Code is \-\-\-\--   |
|      | ."                                                            |
|      |                                                               |
|      | Copy down the confirmation code for future identification of  |
|      | the particular inquiry.                                       |
+------+---------------------------------------------------------------+
| 9    | You will hear, "If you would like the access information      |
|      | repeated, press 1, or if you would like to enter another      |
|      | applicant for the same type of loan, press 2, or for a        |
|      | different type of loan press 3."                              |
|      |                                                               |
|      | -   Enter 1 (to have the applicant's information repeated) or |
|      |                                                               |
|      | -   Enter 2 (then return to Step 5) or                        |
|      |                                                               |
|      | -   Enter 3 (then return to Step 4) or                        |
|      |                                                               |
|      | -   Hang up (if you are finished).                            |
+------+---------------------------------------------------------------+

Continued on next page

6\. Required Search for and Treatment of Debts Owed to the Federal
Government, Continued

  -----------------------------------------------------------------------
  d\. CAIVRS Procedures (continued)

  -----------------------------------------------------------------------

+------+---------------------------------------------------------------+
| **St | **Action**                                                    |
| ep** |                                                               |
+------+---------------------------------------------------------------+
| 10   | If you remain on the line you will hear, "To return to the    |
|      | main menu press zero. If call completed, you may hang up now. |
|      | Thank you for using the HUD Voice Response System."           |
|      |                                                               |
|      | -   Enter 0, or                                               |
|      |                                                               |
|      | -   Hang up.                                                  |
+------+---------------------------------------------------------------+
| 11   | -   Enter the CAIVRS confirmation code on [VA Form            |
|      |     26-6393](http://www.vba.va.gov/pubs/forms/26-6393.pdf),   |
|      |     Loan Analysis, as evidence the screening was performed.   |
|      |                                                               |
|      | -   Enter the code in the space to the right of the "NO"      |
|      |     block in item 47.                                         |
|      |                                                               |
|      | -   For IRRRLs, enter the CAIVRS confirmation code on [VA     |
|      |     Form                                                      |
|      |     26-8923](http://www.vba.va.gov/pubs/forms/26-8923.pdf),   |
|      |     IRRRL Worksheet, beside the word "Note" which is located  |
|      |     near the bottom of the form.                              |
+------+---------------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### e.   | > Give full consideration to the CAIVRS information,    |
|  Applicant | > and any subsequent clarifying information provided,   |
|  Presently | > in applying VA credit standards.                      |
|  Delinquen |                                                         |
| t {#e.-app | -   Consider the terms of any repayment plan in         |
| licant-pre |     analyzing monthly debt payments.                    |
| sently-del |                                                         |
| inquent .u | -   Consider any delinquencies in determining           |
| nnumbered} |     creditworthiness.                                   |
|            |                                                         |
|            |     > CAIVRS information is only for the lender's and   |
|            |     > applicant's use in processing the loan            |
|            |     > application. Only those persons having            |
|            |     > responsibility for screening applicants and/or    |
|            |     > co-obligors may use CAIVRS. **Any other use is    |
|            |     > unauthorized**.                                   |
+------------+---------------------------------------------------------+

Continued on next page

6\. Required Search for and Treatment of Debts Owed to the Federal
Government, Continued

+------------+---------------------------------------------------------+
| e\.        | > If the CAIVRS screening indicates an applicant (or    |
| Applicant  | > co-obligor) is presently delinquent or has had a      |
| Presently  | > foreclosure or a claim paid on a loan made,           |
| Delinquent | > guaranteed, or insured by a Federal agency, take the  |
| (          | > following actions:                                    |
| continued) |                                                         |
+------------+---------------------------------------------------------+

+-------+--------------------------------------------------------------+
| Step  | Action                                                       |
+-------+--------------------------------------------------------------+
| 1     | Suspend processing of the loan application.                  |
+-------+--------------------------------------------------------------+
| 2     | Contact the applicant or co-obligor for information          |
|       | regarding the loan default, foreclosure, or claim.           |
|       |                                                              |
|       | If a previous VA loan is involved, the applicant may call    |
|       |                                                              |
|       | 1-800-827-0648 to make arrangements to repay the debt.       |
+-------+--------------------------------------------------------------+
| 3     | -   Contact the Federal agency that reported the applicant   |
|       |     to CAIVRS if further information is needed.              |
|       |                                                              |
|       | -   Use the phone number provided by CAIVRS (Step 7 in the   |
|       |     previous table).                                         |
+-------+--------------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### f. T | > An applicant cannot be considered a satisfactory      |
| reatment o | > credit risk if he or she is presently delinquent or   |
| f Federal  | > in default on any debt to the Federal Government      |
| Debts {#f. | > until the delinquent account has been brought current |
| -treatment | > or satisfactory arrangements have been made between   |
| -of-federa | > the applicant and the Federal agency. The refinancing |
| l-debts .u | > of a delinquent VA loan with an IRRRL satisfies this  |
| nnumbered} | > requirement.                                          |
|            |                                                         |
|            | > An applicant cannot be considered a satisfactory      |
|            | > credit risk if he or she has a judgment lien against  |
|            | > his or her property for a debt owed to the Government |
|            | > until the judgment is paid or otherwise satisfied.    |
+------------+---------------------------------------------------------+

####  7. Credit History

+------------+---------------------------------------------------------+
| ##### C    | > July 20, 2007, Change 5                               |
| hange Date | >                                                       |
|            | > Subsection c has been changed to better clarify how   |
|            | > to analyze adverse credit.                            |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ####       | > Credit reports used in analyzing VA loans must be     |
| # a. Credi | > either:                                               |
| t Report S |                                                         |
| tandards { | -   Three-file Merged Credit Reports (MCR), or          |
| #a.-credit |                                                         |
| -report-st | -   Residential Mortgage Credit Reports (RMCR).         |
| andards .u |                                                         |
| nnumbered} |     > The credit report must be less than 120 days old  |
|            |     > (180 days for new construction).                  |
|            |                                                         |
|            | -   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).                                      |
|            |                                                         |
|            |     > ***If an RMCR is Used***                          |
|            |                                                         |
|            |     > The standards applicable to an RMCR include, but  |
|            |     > are not limited to, the following:                |
|            |                                                         |
|            | -   the report must be prepared by a reputable credit   |
|            |     reporting agency.                                   |
|            |                                                         |
|            | -   each account with a balance must have been checked  |
|            |     with the creditor within 90 days of the date of the |
|            |     credit report.                                      |
|            |                                                         |
|            | -   for each debt listed, the report must provide the   |
|            |     creditor's name, date the account was opened, high  |
|            |     credit, current status, required payment, unpaid    |
|            |     balance, and payment history.                       |
|            |                                                         |
|            | -   the report must name at least two national          |
|            |     repositories of credit records contacted for each   |
|            |     location in which the borrower has resided during   |
|            |     the most recent two years (separate repository      |
|            |     inquiries are required for any coborrowers with     |
|            |     individual credit records).                         |
|            |                                                         |
|            | -   the report must include all available public        |
|            |     records information that is not considered obsolete |
|            |     under the Fair Credit Reporting Act; such as        |
|            |     bankruptcies, judgments, law suits, foreclosures    |
|            |     and tax liens.                                      |
|            |                                                         |
|            | -   the RMCR must be an original report, with no        |
|            |     erasures, whiteouts, or alterations.                |
|            |                                                         |
|            | -   the report must contain a 24 month employment and   |
|            |     residency history.                                  |
|            |                                                         |
|            | -   all inquiries made within the last 90 days must be  |
|            |     included on the report.                             |
+------------+---------------------------------------------------------+

Continued on next page

7\. Credit History, Continued

+------------+---------------------------------------------------------+
| a\. Credit | > VA may decline to accept a credit report which does   |
| Report     | > not meet these standards.                             |
| Standards  | >                                                       |
| (          | > VA will notify the lender and the credit reporting    |
| continued) | > agency of how quality standards are not being met. If |
|            | > the problem continues, VA will inform all             |
|            | > participating lenders that credit reports from the    |
|            | > particular credit reporting agency are unacceptable.  |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### b    | > See section 5 of this chapter for requirements of     |
| . Verifica | > verification.                                         |
| tion and R |                                                         |
| ating of D |                                                         |
| ebts and O |                                                         |
| bligations |                                                         |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### c. H | > The applicant's past repayment practices on           |
| ow to Anal | > obligations are the best indicator of his or her      |
| yze Credit | > willingness to repay future obligations. Emphasis     |
|            | > should be on the applicant's overall payment patterns |
|            | > rather than isolated occurrences of unsatisfactory    |
|            | > repayment. Determine whether the applicant (and       |
|            | > spouse, if applicable) is a satisfactory credit risk  |
|            | > based on a careful analysis of the credit report and  |
|            | > other credit data.                                    |
|            | >                                                       |
|            | > ***Rent and Mortgage Payment History***               |
|            | >                                                       |
|            | > The applicant's rental history and any outstanding,   |
|            | > assumed, or recently retired mortgages must be        |
|            | > verified and rated.                                   |
|            | >                                                       |
|            | > Housing expense payment history is often the best     |
|            | > indicator of how motivated the applicant is to make   |
|            | > timely mortgage payments in the future.               |
|            | >                                                       |
|            | > ***Absence of Credit History***                       |
|            | >                                                       |
|            | > For applicants with no established credit history,    |
|            | > base the determination on the applicant's payment     |
|            | > record on utilities, rent, automobile insurance, or   |
|            | > other expenses that applicant has paid.               |
+------------+---------------------------------------------------------+

Continued on next page

7\. Credit History, Continued

+------------+---------------------------------------------------------+
| c\. How to | > Absence of a credit history is **not** generally      |
| Analyze    | > considered an adverse factor. It may result when:     |
| Credit     |                                                         |
| (          | -   recently discharged veterans have not yet developed |
| continued) |     a credit history                                    |
|            |                                                         |
|            | -   applicants have routinely used cash rather than     |
|            |     credit, and/or                                      |
|            |                                                         |
|            | -   applicants have not used credit since some          |
|            |     disruptive credit event such as bankruptcy or debt  |
|            |     pro-ration through consumer credit counseling. In   |
|            |     these cases, develop evidence of timely payment of  |
|            |     noninstallment obligations such as rent and         |
|            |     utilities since the disruptive credit event.        |
|            |                                                         |
|            | ***Reference***: For bankruptcy cases, see "Bankruptcy" |
|            | in this section.                                        |
|            |                                                         |
|            | > ***Accounts in the Spouse's Name***                   |
|            |                                                         |
|            | > Under ECOA - Upon the applicant's request, the lender |
|            | > must consider any account reported in the name of the |
|            | > applicant's spouse or former spouse that the          |
|            | > applicant can demonstrate accurately reflects the     |
|            | > applicant's creditworthiness.                         |
|            |                                                         |
|            | > ***Consideration of the Spouse's Credit History***    |
|            |                                                         |
|            | > ECOA prohibits requests for, or consideration of, the |
|            | > credit of 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                              |
|            |                                                         |
|            | -   in community property states.                       |
|            |                                                         |
|            | ```{=html}                                              |
|            | <!-- -->                                                |
|            | ```                                                     |
|            | -   If the property is located in a community property  |
|            |     state, VA requires consideration of the spouse's    |
|            |     credit (whether or not the spouse will be           |
|            |     personally liable on the note and whether or not    |
|            |     the applicant and spouse choose to have the         |
|            |     spouse's income considered).                        |
|            |                                                         |
|            | -   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 credit only in a             |
|            |     non-community property state.                       |
+------------+---------------------------------------------------------+

Continued on next page

7\. Credit History, Continued

+------------+---------------------------------------------------------+
| c\. How to | > ***Adverse Data***                                    |
| Analyze    |                                                         |
| Credit     | > Reestablished Credit: In circumstances not involving  |
| (          | > bankruptcy, satisfactory credit is generally          |
| continued) | > considered to be reestablished after the veteran, or  |
|            | > veteran and spouse, have made satisfactory payments   |
|            | > for 12 months after the date the last derogatory      |
|            | > credit item was satisfied. For example, assume a      |
|            | > credit report reveals several unpaid collections,     |
|            | > including some which have been outstanding for many   |
|            | > years. Once the borrower has satisfied the            |
|            | > obligations, and then makes timely payments on        |
|            | > subsequent obligations for at least 12 months,        |
|            | > satisfactory credit is reestablished.                 |
|            |                                                         |
|            | > Collections: Isolated collection accounts do not      |
|            | > necessarily have to be paid off as a condition for    |
|            | > loan approval. For example, a credit report may show  |
|            | > numerous satisfactory accounts and one or two unpaid  |
|            | > medical (or other) collections. In such instances,    |
|            | > while it would be preferable to have collections      |
|            | > paid, it would not necessarily be a requirement for   |
|            | > loan approval. However, collection accounts must be   |
|            | > considered part of the borrower's overall credit      |
|            | > history and unpaid collection accounts should be      |
|            | > considered open, recent credit. Borrowers with a      |
|            | > history of collection accounts should have            |
|            | > reestablished satisfactory credit (see previous       |
|            | > paragraph) in order to be considered a satisfactory   |
|            | > credit risk.                                          |
|            |                                                         |
|            | > Disputed Accounts: Lenders may consider a veteran\'s  |
|            | > claim of bona fide or legal defenses regarding unpaid |
|            | > debts except when the debt has been reduced to        |
|            | > judgment. Account balances reduced to judgment by a   |
|            | > court must either be paid in full or subject to a     |
|            | > repayment plan with a history of timely payments. For |
|            | > unpaid debts or debts that have not been paid timely, |
|            | > pay-off of these debts after the acceptability of     |
|            | > applicant\'s credit is questioned does not alter the  |
|            | > unsatisfactory record of payment.                     |
|            |                                                         |
|            | > Summary: The above guidance is not meant to address   |
|            | > every possible scenario. Lenders should carefully     |
|            | > review the complete credit history and use their      |
|            | > judgment. For example, if an applicant has numerous   |
|            | > unpaid collections -- no matter when they were        |
|            | > established -- it's not unreasonable to question the  |
|            | > borrower's ability and willingness to honor           |
|            | > obligations. If the applicant and/or spouse are       |
|            | > determined satisfactory credit risks in spite of      |
|            | > derogatory credit information, the loan file should   |
|            | > include an explanation from the applicant(s) and the  |
|            | > lender's underwriter of the basis for the             |
|            | > determination. If lenders are unsure about a          |
|            | > particular situation, they should contact the         |
|            | > appropriate VA Regional Loan Center.                  |
+------------+---------------------------------------------------------+

7\. Credit History, Continued

+------------+---------------------------------------------------------+
| ##### d. C | > If a veteran, or veteran and spouse, have prior       |
| onsumer Cr | > adverse credit and are participating in a Consumer    |
| edit Couns | > Credit Counseling plan, they may be determined to be  |
| eling Plan | > a satisfactory credit risk if they demonstrate 12     |
|  {#d.-cons | > months' satisfactory payments and the counseling      |
| umer-credi | > agency approves the new credit.                       |
| t-counseli |                                                         |
| ng-plan .u | > If a veteran, or veteran and spouse, have good prior  |
| nnumbered} | > credit and are participating in a Consumer Credit     |
|            | > Counseling plan, such participation is to be          |
|            | > considered a neutral factor, or even a positive       |
|            | > factor, in determining creditworthiness. Do not treat |
|            | > this as a negative credit item if the veteran entered |
|            | > the Consumer Credit Counseling plan before reaching   |
|            | > the point of having bad credit.                       |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### e.   | > The fact that a bankruptcy exists in an applicant's   |
|  Bankruptc | > (or spouse's) credit history does **not** in itself   |
| y {#e.-ban | > disqualify the loan. Develop complete information on  |
| kruptcy .u | > the facts and circumstances of the bankruptcy.        |
| nnumbered} | > Consider the reasons for the bankruptcy and the type  |
|            | > of bankruptcy filing.                                 |
|            |                                                         |
|            | > ***Bankruptcy Filed Under the Straight Liquidation    |
|            | > and Discharge Provisions of the Bankruptcy Law***     |
|            |                                                         |
|            | > You may disregard a bankruptcy discharged more than   |
|            | > two years ago.                                        |
|            |                                                         |
|            | > If the bankruptcy was discharged within the last one  |
|            | > to two years, it is probably **not** possible to      |
|            | > determine that the applicant or spouse is a           |
|            | > satisfactory credit risk unless both of the following |
|            | > requirements are met:                                 |
|            |                                                         |
|            | -   the applicant or spouse has obtained consumer items |
|            |     on credit subsequent to the bankruptcy and has      |
|            |     satisfactorily made the payments over a continued   |
|            |     period, and                                         |
|            |                                                         |
|            | -   the bankruptcy was caused by circumstances beyond   |
|            |     the control of the applicant or spouse such as      |
|            |     unemployment, prolonged strikes, medical bills not  |
|            |     covered by insurance, and so on, and the            |
|            |     circumstances are verified. Divorce is **not**      |
|            |     generally viewed as beyond the control of the       |
|            |     borrower and/or spouse. If the bankruptcy was       |
|            |     caused by failure of the business of a              |
|            |     self-employed applicant, it may be possible to      |
|            |     determine that the applicant is a satisfactory      |
|            |     credit risk if                                      |
|            |                                                         |
|            | ```{=html}                                              |
|            | <!-- -->                                                |
|            | ```                                                     |
|            | -   the applicant obtained a permanent position after   |
|            |     the business failed                                 |
|            |                                                         |
|            | -   there is no derogatory credit information prior to  |
|            |     self-employment                                     |
|            |                                                         |
|            | -   there is no derogatory credit information           |
|            |     subsequent to the bankruptcy, and                   |
|            |                                                         |
|            | -   failure of the business was **not** due to the      |
|            |     applicant's misconduct.                             |
+------------+---------------------------------------------------------+

Continued on next page

7\. Credit History, Continued

+------------+---------------------------------------------------------+
| e\.        | > If a borrower or spouse has been discharged in        |
| Bankruptcy | > bankruptcy within the past 12 months, it will **not** |
| (          | > generally be possible to determine that the borrower  |
| continued) | > or spouse is a satisfactory credit risk.              |
|            |                                                         |
|            | > ***Petition Under Chapter 13 of the Bankruptcy        |
|            | > Code***                                               |
|            |                                                         |
|            | > This type of filing indicates an effort to pay        |
|            | > creditors. Regular payments are made to a             |
|            | > court-appointed trustee over a two to three year      |
|            | > period or, in some cases, up to five years, to pay    |
|            | > off scaled down or entire debts.                      |
|            |                                                         |
|            | > If the applicant has finished making all payments     |
|            | > satisfactorily, the lender may conclude that the      |
|            | > applicant has reestablished satisfactory credit.      |
|            |                                                         |
|            | > If the applicant has satisfactorily made at least 12  |
|            | > months' worth of the payments and the Trustee or the  |
|            | > Bankruptcy Judge approves of the new credit, the      |
|            | > lender may give favorable consideration.              |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##         | > The fact that a home loan foreclosure (or             |
| ### f. For | > deed-in-lieu of foreclosure) exists in an applicant's |
| eclosures  | > (or spouse's) credit history does **not** in itself   |
| {#f.-forec | > disqualify the loan.                                  |
| losures .u |                                                         |
| nnumbered} | -   Develop complete information on the facts and       |
|            |     circumstances of the foreclosure.                   |
|            |                                                         |
|            | -   Apply the guidelines provided for bankruptcies      |
|            |     filed under the straight liquidation and discharge  |
|            |     provisions of the bankruptcy law. See the preceding |
|            |     heading entitled "Bankruptcy."                      |
|            |                                                         |
|            |     > If the foreclosure was on a VA loan, the          |
|            |     > applicant may not have full entitlement available |
|            |     > for the new loan. Ensure that the applicant's     |
|            |     > Certificate of Eligibility reflects sufficient    |
|            |     > entitlement to meet any secondary marketing       |
|            |     > requirements of the lender.                       |
+------------+---------------------------------------------------------+

#### 8. Documentation for Automated Underwriting Cases {#documentation-for-automated-underwriting-cases .unnumbered}

+------------+---------------------------------------------------------+
| ##### C    | > July 20, 2007, Change 5                               |
| hange Date |                                                         |
|            | Subsection b has been changed to update the reference   |
|            | from "Loan Prospector" to "Automated Underwriting."     |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##         | > VA has approved Freddie Mac's Loan Prospector, Fannie |
| ### a. Gen | > Mae's DU, pmiAura System for VA, CLUES (for loans     |
| eral {#a.- | > originated by Countrywide), Zippy (for loans          |
| general .u | > originated by Chase), Automated Underwriting Systems  |
| nnumbered} | > (AUS) for use in connection with VA guaranteed home   |
|            | > loans. These systems incorporate VA's credit          |
|            | > standards and processing requirements.                |
|            | >                                                       |
|            | > Lenders may use certain reduced documentation         |
|            | > requirements on cases processed with approved AUSs.   |
|            | > The level of reduced documentation depends on the     |
|            | > risk classification assigned. The systems use         |
|            | > slightly different terminology such as Approve or     |
|            | > Accept. The tables in this section give a general     |
|            | > description of documentation waivers. Please note     |
|            | > that the documentation requirements are the same for  |
|            | > these cases as for non-AUS cases, except for any      |
|            | > differences cited in the tables.                      |
|            | >                                                       |
|            | > ***Data Integrity***                                  |
|            |                                                         |
|            | > It is imperative that the data entered into the       |
|            | > automated underwriting system be accurately verified. |
|            | > The data utilized by the system must be supported by  |
|            | > source documentation obtained by the lender.          |
|            | > Inaccurate or unverified data will result in          |
|            | > invalidation of the risk classification. Under        |
|            | > certain circumstances it could also result in a       |
|            | > finding of material misrepresentation, which could    |
|            | > affect the validity of the guaranty.                  |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| #####      | > Because the Automated Underwriting system will be     |
| b. Underwr | > making the determination that the loan satisfies      |
| iter's Cer | > credit and income requirements, cases receiving an    |
| tification | > "Accept" or "Approve" rating will not require the     |
|            | > underwriter's certification on [VA Form               |
|            | >                                                       |
|            | 26-6393,](http://www.vba.va.gov/pubs/forms/26-6393.pdf) |
|            | > Loan Analysis (items 50 through 54). Instead, lenders |
|            | > will need to complete the following certification on  |
|            | > "Accept" or "Approve" loans:                          |
|            | >                                                       |
|            | > "I, the undersigned lender, hereby certify that case  |
|            | > number (insert VA loan number) was processed through  |
|            | > \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ and received an        |
|            | > 'Accept/Approve' rating. I further certify that all   |
|            | > information entered into the system has been verified |
|            | > and that any credit discrepancies have been           |
|            | > reconciled."                                          |
+------------+---------------------------------------------------------+

Continued on next page

8\. Documentation for Automated Underwriting Cases, Continued

+------------+---------------------------------------------------------+
| b\.        | > A representative of the lender must sign this         |
| Und        | > certification. The certification and a copy of the    |
| erwriter's | > AUS Feedback Certificate (which indicates the risk    |
| Cer        | > classification) must be maintained with the           |
| tification | > origination package.                                  |
| (          |                                                         |
| continued) |                                                         |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##         | > Refer to the following table for Documentation        |
| ### c. Doc | > guidelines for credit history.                        |
| umentation |                                                         |
|  Guideline |                                                         |
| s For Cred |                                                         |
| it History |                                                         |
+------------+---------------------------------------------------------+

+-----------+----------------------------+----------------------------+
| Subject   | Documentation              |                            |
| and       | Classification             |                            |
| Reference |                            |                            |
+-----------+----------------------------+----------------------------+
|           | Documentation Guidelines   | Additional Documentation   |
|           | and Reductions for Refer   | Reductions for             |
|           |                            | Accept/Approve             |
+-----------+----------------------------+----------------------------+
| Types of  | Use any of the following   | Same as Refer.             |
| credit    | if [\<]{.underline}120     |                            |
| reports   | days old.                  |                            |
| used in   |                            |                            |
| recon     | -   All in-file reports.   |                            |
| ciliation |                            |                            |
| (section  | -   Selected in-file       |                            |
| 7 of this |     reports.               |                            |
| chapter)  |                            |                            |
|           | -   Merged credit report.  |                            |
|           |                            |                            |
|           | -   RMCR.                  |                            |
+-----------+----------------------------+----------------------------+
| Ex        | No explanation is          | Same as Refer.             |
| planation | required.                  |                            |
| of        |                            |                            |
| disc      |                            |                            |
| repancies |                            |                            |
| in        |                            |                            |
| reported  |                            |                            |
| debt      |                            |                            |
| (section  |                            |                            |
| 5 of this |                            |                            |
| chapter)  |                            |                            |
+-----------+----------------------------+----------------------------+
| Rental    | Provide a 12 month rental  | No verification of rent is |
| payment   | history directly from      | required.                  |
| history   | landlord, through          |                            |
| (section  | information shown on       |                            |
| 7 of this | credit report or by        |                            |
| chapter)  | cancelled checks.          |                            |
+-----------+----------------------------+----------------------------+
| Ver       | Obtain direct verification | Same as Refer.             |
| ification | for significant debts not  |                            |
| of        | reported on the credit     | ***Note***: Perform manual |
| si        | report.                    | downgrade to Refer if      |
| gnificant |                            | direct verification        |
| no        | ***Note***: Significant    | reveals more than 1x30 day |
| nmortgage | means that the debt has a  | late payment in the past   |
| debt      | monthly payment exceeding  | 12 months for any of the   |
| (section  | 2% of the stable monthly   | omitted debts.             |
| 5 of this | income for all borrowers.  |                            |
| chapter)  |                            |                            |
+-----------+----------------------------+----------------------------+

Continued on next page

8\. Documentation for Automated Underwriting Cases, Continued

  -----------------------------------------------------------------------
  c\. Documentation Guidelines For Credit History (continued)

  -----------------------------------------------------------------------

+-----------+----------------------------+----------------------------+
| Subject   | Documentation              |                            |
| and       | Classification             |                            |
| Reference |                            |                            |
+-----------+----------------------------+----------------------------+
| Mortgage  | Obtain direct verification | Perform manual downgrade   |
| payment   | when ratings are not       | to Refer for any mortgage  |
| history   | available on mortgages     | debt with more than 1x30   |
| (section  | that are any of the        | day late payment in the    |
| 7 of this | following:                 | past 12 months.            |
| chapter)  |                            |                            |
|           | -   Outstanding.           |                            |
|           |                            |                            |
|           | -   Assumed.               |                            |
|           |                            |                            |
|           | -   Recently retired.      |                            |
|           |                            |                            |
|           | A written explanation of   |                            |
|           | mortgage payment history   |                            |
|           | is required for borrowers  |                            |
|           | with more than 1x30 day    |                            |
|           | late payment for all       |                            |
|           | mortgages for the past 12  |                            |
|           | months.                    |                            |
+-----------+----------------------------+----------------------------+
| Account   | If a mortgage or other     | Same as Refer, however if  |
| balances  | significant debt is listed | rating is currently        |
| (section  | on the credit report as    | [\>]{.underline}90 days    |
| 7 of this | past due and was last      | past due, manually         |
| chapter)  | updated [\>]{.underline}90 | downgrade to **REFER**.    |
|           | days, verify current       |                            |
|           | status of                  |                            |
|           | [past]{.underline}         |                            |
|           | [due]{.underline}          |                            |
|           | [debt]{.underline}.        |                            |
+-----------+----------------------------+----------------------------+
| D         | Obtain explanation for     | No determination of ratios |
| erogatory | derogatory credit. Explain | or credit worthiness is    |
| credit    | assessment of              | required.                  |
| in        | creditworthiness on [VA    |                            |
| formation | Form                       |                            |
| (section  | 26-6393](http://w          |                            |
| 7 of this | ww.vba.va.gov/pubs/forms/2 |                            |
| chapter)  | 6-6393.pdf)[,]{.underline} |                            |
|           | Loan Analysis.             |                            |
+-----------+----------------------------+----------------------------+
| Alimony   | Provide the following:     | Same as Refer.             |
| and/or    |                            |                            |
| child     | -   Proof of deposits on   |                            |
| support   |     bank statements for 3  |                            |
| payments  |     months.                |                            |
| (section  |                            |                            |
| 2 of this | -   Front page and details |                            |
| chapter)  |     of support payments    |                            |
|           |     from the divorce       |                            |
|           |     decree, indicating     |                            |
|           |     evidence of at least 3 |                            |
|           |     years continuance.     |                            |
+-----------+----------------------------+----------------------------+

Continued on next page

8\. Documentation for Automated Underwriting Cases, Continued

+------------+---------------------------------------------------------+
| #####      | > Refer to the following table for documentation        |
|  d. Docume | > guidelines for employment/income for borrowers who    |
| ntation Gu | > are not self-employed.                                |
| idelines f |                                                         |
| or Borrowe |                                                         |
| rs-Not Sel |                                                         |
| f Employed |                                                         |
+------------+---------------------------------------------------------+

+-----------+-----------------------------+----------------------------+
| Subject   | Documentation               |                            |
| and       | Classification              |                            |
| Reference |                             |                            |
+-----------+-----------------------------+----------------------------+
|           | Documentation Guidelines    | Additional Documentation   |
|           | and Reductions for Refer    | Reductions for             |
|           |                             | Accept/Approve             |
+-----------+-----------------------------+----------------------------+
| E         | No explanation for          | No explanation for         |
| mployment | employment gaps is required | employment gaps is         |
| gaps      | if the gaps are \<30 days.  | required if gaps are \<60  |
| (section  |                             | days.                      |
| 2 of this |                             |                            |
| chapter)  |                             |                            |
+-----------+-----------------------------+----------------------------+
| Verifying | Document telephone contact  | Same as Refer.             |
| current   | verifying borrower's        |                            |
| e         | current employer.           |                            |
| mployment |                             |                            |
| for       | Use pay stubs covering at   |                            |
| borrowers | least 1 full month of       |                            |
| who are   | employment and contains the |                            |
| not       | following:                  |                            |
| self      |                             |                            |
| -employed | -   Year-to-date (YTD)      |                            |
| (section  |     information             |                            |
| 2 of this |                             |                            |
| chapter)  | -   Bonus information       |                            |
|           |                             |                            |
|           | -   Overtime information.   |                            |
+-----------+-----------------------------+----------------------------+

Continued on next page

8\. Documentation for Automated Underwriting Cases, Continued

  -----------------------------------------------------------------------
  d\. Documentation Guidelines for Borrowers-Not Self Employed
  (continued)

  -----------------------------------------------------------------------

+-----------+-----------------------------+----------------------------+
| Subject   | Documentation               |                            |
| and       | Classification              |                            |
| Reference |                             |                            |
+-----------+-----------------------------+----------------------------+
| Verifying | Use a Verification of       | No VOE is required if the  |
| previous  | Employment (VOE) or any of  | borrower has been with the |
| e         | the following, covering the | same employer for 1 year   |
| mployment | 2 year period prior to      | and W-2 Forms for 1        |
| (section  | closing:                    | previous year have been    |
| 2 of this |                             | collected.                 |
| chapter)  | -   W-2 Forms.              |                            |
|           |                             | -   No W-2 Forms are       |
|           | -   Income information      |     required for a         |
|           |     obtained from the IRS   |     borrower on active     |
|           |     via one of the          |     duty.                  |
|           |     following forms:        |                            |
|           |                             | -   No W-2 Forms are       |
|           | ```{=html}                  |     required if all of the |
|           | <!-- -->                    |     following are met:     |
|           | ```                         |                            |
|           | -   Form 8821 (or alternate | ```{=html}                 |
|           |     form acceptable to the  | <!-- -->                   |
|           |     IRS that collects       | ```                        |
|           |     comparable information) | -   Borrower with same     |
|           |     or                      |     employer               |
|           |                             |     [\>]{.underline}2      |
|           | -   Form 4506 (or alternate |     years                  |
|           |     form acceptable to the  |                            |
|           |     IRS that collects       | -   Employer phone contact |
|           |     comparable              |     verifies the length of |
|           |     information).           |     employment and current |
|           |                             |     status (still          |
|           |                             |     employed)              |
|           |                             |                            |
|           |                             | -   Borrower not           |
|           |                             |     self-employed or       |
|           |                             |     commissioned           |
|           |                             |                            |
|           |                             | -   Bonus, overtime, or    |
|           |                             |     secondary income not   |
|           |                             |     needed to qualify      |
|           |                             |                            |
|           |                             | -   Stable monthly income  |
|           |                             |     to be determined by    |
|           |                             |     using current base pay |
|           |                             |     only (rather than      |
|           |                             |     total earnings)        |
|           |                             |                            |
|           |                             | -   Borrower signs one of  |
|           |                             |     the following for the  |
|           |                             |     previous 2 tax years:  |
|           |                             |                            |
|           |                             | -   Form 8821, and         |
|           |                             |                            |
|           |                             | -   Form 4506.             |
+-----------+-----------------------------+----------------------------+

Continued on next page

8\. Documentation for Automated Underwriting Cases, Continued

+------------+---------------------------------------------------------+
| #          | > Refer to the following table for documentation        |
| #### e. Do | > guidelines for employment/income for borrowers who    |
| cumentatio | > are self-employed.                                    |
| n Guidelin |                                                         |
| es for Bor |                                                         |
| rowers-Sel |                                                         |
| f Employed |                                                         |
+------------+---------------------------------------------------------+

+-----------+-----------------------------+---------------------------+
| Subject   | Documentation               |                           |
| and       | Classification              |                           |
| Reference |                             |                           |
+-----------+-----------------------------+---------------------------+
|           | Documentation Guidelines    | Additional Documentation  |
|           | and Reductions for Refer    | Reductions for            |
|           |                             | Accept/Approve            |
+-----------+-----------------------------+---------------------------+
| I         | Provide one of the          | Same as Refer.            |
| ndividual | following, with all line    |                           |
| tax       | items captured:             |                           |
| returns   |                             |                           |
| for       | -   Signed copies of        |                           |
| self      |     individual tax returns  |                           |
| -employed |     for the most recent 2   |                           |
| borrowers |     year period.            |                           |
| (section  |                             |                           |
| 2 of this | -   Individual income       |                           |
| chapter)  |     information obtained    |                           |
|           |     from the IRS via one of |                           |
|           |     the following forms:    |                           |
|           |                             |                           |
|           | ```{=html}                  |                           |
|           | <!-- -->                    |                           |
|           | ```                         |                           |
|           | -   Form 8821 (or an        |                           |
|           |     alternate form          |                           |
|           |     acceptable to the IRS   |                           |
|           |     that collects           |                           |
|           |     comparable information) |                           |
|           |     or                      |                           |
|           |                             |                           |
|           | -   Form 4506 (or an        |                           |
|           |     alternate form          |                           |
|           |     acceptable to the IRS   |                           |
|           |     that collects           |                           |
|           |     comparable              |                           |
|           |     information).           |                           |
+-----------+-----------------------------+---------------------------+
| Balance   | No balance sheet or YTD     | No balance sheet or YTD   |
| sheets    | Profit and Loss (YTD P&L)   | P&L is required.          |
| and       | is required if any of the   |                           |
| profit    | following occur:            |                           |
| and loss  |                             |                           |
| s         | -   Origination date is     |                           |
| tatements |     [\<]{.underline} 7      |                           |
| for       |     months from the         |                           |
| self      |     business' fiscal year   |                           |
| -employed |     end (for which tax      |                           |
| borrowers |     returns or information  |                           |
| (section  |     from the IRS via Form   |                           |
| 2 of this |     8821 or Form 4506 were  |                           |
| chapter)  |     provided).              |                           |
+-----------+-----------------------------+---------------------------+

Continued on next page

8\. Documentation for Automated Underwriting Cases, Continued

  -----------------------------------------------------------------------
  e\. Documentation Guidelines for Borrowers-Self Employed (continued)

  -----------------------------------------------------------------------

+-----------+-----------------------------+----------------------------+
| Subject   | Documentation               |                            |
| and       | Classification              |                            |
| Reference |                             |                            |
+-----------+-----------------------------+----------------------------+
|           | Documentation Guidelines    | Additional Documentation   |
|           | and Reductions for Refer    | Reductions for             |
|           |                             | Accept/Approve             |
+-----------+-----------------------------+----------------------------+
| Business  | Provide one of the          | No business tax returns    |
| tax       | following, with all line    | are required if all of the |
| returns   | items captured:             | following conditions are   |
| for       |                             | met:                       |
| self      | -   Signed copies of        |                            |
| -employed |     business tax returns    | -   Borrower proves        |
| borrowers |     for the most recent 2   |     ownership of the       |
| (section  |     year period.            |     business for at least  |
| 2 of this |                             |     the past 5 years.      |
| chapter)  | -   Business income         |                            |
|           |     information obtained    | -   Individual tax returns |
|           |     from the IRS via one of |     reflect consistent     |
|           |     the following forms:    |     income for the past 2  |
|           |                             |     years.                 |
|           | ```{=html}                  |                            |
|           | <!-- -->                    | -   Funds for down payment |
|           | ```                         |     or closing costs are   |
|           | -   Form 8821 (or an        |     not from the business. |
|           |     alternate form          |                            |
|           |     acceptable to the IRS   |                            |
|           |     that collects           |                            |
|           |     comparable information) |                            |
|           |     or                      |                            |
|           |                             |                            |
|           | -   Form 4506 (or an        |                            |
|           |     alternate form          |                            |
|           |     acceptable to the IRS   |                            |
|           |     that collects           |                            |
|           |     comparable              |                            |
|           |     information.)           |                            |
+-----------+-----------------------------+----------------------------+

Continued on next page

8\. Documentation for Automated Underwriting Cases, Continued

+------------+---------------------------------------------------------+
| ####       | > Refer to the following table for documentation        |
| # f. Docum | > guidelines for assets.                                |
| entation G |                                                         |
| uidelines  |                                                         |
| for Assets |                                                         |
+------------+---------------------------------------------------------+

+-----------+-----------------------------+---------------------------+
| Subject   | Documentation               |                           |
| and       | Classification              |                           |
| Reference |                             |                           |
+-----------+-----------------------------+---------------------------+
|           | Documentation Guidelines    | Additional Documentation  |
|           | and Reductions for Refer    | Reductions for            |
|           |                             | Accept/Approve            |
+-----------+-----------------------------+---------------------------+
| Verify    | Verify veteran's source of  | No verification of        |
| closing   | funds for payment of any    | veteran's source of funds |
| costs     | difference between sales    | is required if closing    |
| (section  | price and loan amount plus  | costs plus difference     |
| 4         | closing costs, if sales     | between the sales price   |
| s         | price exceeds reasonable    | of the property and the   |
| ubsection | value established by the    | base loan amount is \<4%  |
| a of this | Notice of Value (NOV).      | of the lesser of the      |
| chapter)  |                             | following:                |
|           |                             |                           |
|           |                             | -   Sales price           |
|           |                             |                           |
|           |                             | -   Reasonable value      |
|           |                             |     established by a NOV. |
+-----------+-----------------------------+---------------------------+
| Verify    | Provide original bank       | Provide original bank     |
| assets to | statements or certified     | statements or certified   |
| close in  | true copies covering the    | true copies covering most |
| ap        | most recent 2 month period  | recent 1 month period in  |
| plicant's | in lieu of a Verification   | lieu of a VOD.            |
| name      | of Deposit (VOD).           |                           |
| (section  |                             |                           |
| 4 of this |                             |                           |
| chapter)  |                             |                           |
+-----------+-----------------------------+---------------------------+

#### 9. How to Complete VA Form 26-6393, Loan Analysis {#how-to-complete-va-form-26-6393-loan-analysis .unnumbered}

+------------+---------------------------------------------------------+
| ##### C    | > July 20, 2007, Change 5                               |
| hange Date |                                                         |
|            | Subsections b and f have been changed to update the     |
|            | reference to VA Form 26-6393 line numbers.              |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ####       | > In order to properly enter information on [VA Form    |
| # a. Gener | >                                                       |
| al {#a.-ge | 26-6393](http://www.vba.va.gov/pubs/forms/26-6393.pdf), |
| neral-1 .u | > the underwriter must understand and apply the         |
| nnumbered} | > guidelines provided in the preceding sections of this |
|            | > chapter.                                              |
|            |                                                         |
|            | > Self-explanatory items are **not** discussed in this  |
|            | > section.                                              |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| #####      | > Special instructions are listed in the following      |
| b. Estimat | > table.                                                |
| ed Monthly |                                                         |
|  Shelter E |                                                         |
| xpenses {# |                                                         |
| b.-estimat |                                                         |
| ed-monthly |                                                         |
| -shelter-e |                                                         |
| xpenses .u |                                                         |
| nnumbered} |                                                         |
+------------+---------------------------------------------------------+

+-------+--------------------------------------------------------------+
| Item  | Special Instructions                                         |
+-------+--------------------------------------------------------------+
| 16    | If taxes are expected to increase, use the increased amount. |
+-------+--------------------------------------------------------------+
| 17    | Include the flood insurance premium for properties located   |
|       | in special flood hazard areas.                               |
+-------+--------------------------------------------------------------+
| 18    | If special assessments are anticipated, use the anticipated  |
|       | amount.                                                      |
+-------+--------------------------------------------------------------+
| 19    | Calculate maintenance and utility costs using 14¢ per square |
|       | foot.                                                        |
|       |                                                              |
|       | [Example:]{.underline} A 1500 square foot home would have a  |
|       | combined maintenance and utility cost of \$210 (1500sq X     |
|       | .14).                                                        |
+-------+--------------------------------------------------------------+
| 20    | For condominiums or houses in a Planned Unit Development     |
|       | (PUD), include the monthly amount of maintenance assessment  |
|       | payable to the homeowner's association.                      |
|       |                                                              |
|       | If the assessment is less than the maximum provided in the   |
|       | covenants or master deed and it appears likely that the      |
|       | assessment will be insufficient for operation of the         |
|       | condominium or PUD, include the maximum amount the veteran   |
|       | could be charged.                                            |
+-------+--------------------------------------------------------------+

Continued on next page

9\. How to Complete VA Form 26-6393, Loan Analysis, Continued

+------------+---------------------------------------------------------+
| ##### c. D | > List all known debts and obligations of the applicant |
| ebts and O | > and spouse including any alimony and/or child support |
| bligations | > payments.                                             |
|  {#c.-debt |                                                         |
| s-and-obli | > Place a check mark in the () column next to any       |
| gations .u | > "significant" debt or obligation. See the topic       |
| nnumbered} | > "Analysis of Debts and Obligations" in section 5 of   |
|            | > this chapter, for an explanation of "significant."    |
|            |                                                         |
|            | > ***Job Related Expense***                             |
|            |                                                         |
|            | > Include any costs for child care, significant         |
|            | > commuting costs, and any other direct or incidental   |
|            | > costs associated with the applicant's (or spouse's)   |
|            | > employment. Checkmark this item if total job related  |
|            | > expenses are significant.                             |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| #          | > Enter the applicant's estimated monthly Federal       |
| #### d. It | > income tax. If the applicant has a Mortgage Credit    |
| em 33, Fed | > Certificate, reduce the Federal income tax by the     |
| eral Incom | > estimated tax credit.                                 |
| e Tax {#d. |                                                         |
| -item-33-f | > ***Reference***: See the topic "Income Tax Credits    |
| ederal-inc | > from Mortgage Credit Certificates" in section 3 of    |
| ome-tax .u | > this chapter.                                         |
| nnumbered} |                                                         |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### e    | > Enter the appropriate residual income amount from the |
| . Item 44, | > following tables in the "guideline" box. Residual     |
|  Balance A | > income is the amount of net income remaining (after   |
| vailable f | > deduction of debts and obligations and monthly        |
| or Family  | > shelter expenses) to cover family living expenses     |
| Support {# | > such as food, health care, clothing, and gasoline.    |
| e.-item-44 |                                                         |
| -balance-a | > The numbers are based on data supplied in the         |
| vailable-f | > Consumer Expenditures Survey (CES) published by the   |
| or-family- | > Department of Labor's Bureau of Labor Statistics.     |
| support .u | > They vary according to loan size, family size, and    |
| nnumbered} | > region of the country.                                |
|            |                                                         |
|            | > ***Special Instructions for Using Tables***           |
|            |                                                         |
|            | > Count **all** members of the household (without       |
|            | > regard to the nature of the relationship) when        |
|            | > determining "family size," including:                 |
|            |                                                         |
|            | -   an applicant's spouse who is **not** joining in     |
|            |     title or on the note, and                           |
|            |                                                         |
|            | -   any other individuals who depend on the applicant   |
|            |     for support. For example, children from a spouse's  |
|            |     prior marriage who are not the applicant's legal    |
|            |     dependents.                                         |
+------------+---------------------------------------------------------+

Continued on next page

9\. How to Complete VA Form 26-6393, Loan Analysis, Continued

+------------+---------------------------------------------------------+
| ##### e.   | > ***Special Instructions for Using Tables**            |
| Item 44, B | > (continued)*                                          |
| alance Ava |                                                         |
| ilable for | > **Exception**: The lender may omit any individuals    |
|  Family Su | > from "family size" who are fully supported from a     |
| pport (con | > source of verified income which, for whatever reason, |
| tinued) {# | > is **not** included in effective income in the loan   |
| e.-item-44 | > analysis. For example:                                |
| -balance-a |                                                         |
| vailable-f | -   a spouse not obligated on the note who has stable   |
| or-family- |     and reliable income sufficient to support his or    |
| support-co |     her living expenses, or                             |
| ntinued .u |                                                         |
| nnumbered} | -   a child for whom sufficient foster care payments or |
|            |     child support is received regularly.                |
|            |                                                         |
|            |     > Reduce the residual income figure (from the       |
|            |     > following tables) by a minimum of 5 percent if    |
|            |                                                         |
|            | -   the applicant or spouse is an active-duty or        |
|            |     retired serviceperson, and                          |
|            |                                                         |
|            | -   there is a clear indication that he or she will     |
|            |     continue to receive the benefits resulting from use |
|            |     of military-based facilities located near the       |
|            |     property.                                           |
|            |                                                         |
|            |     > Use 5 percent unless the VA office of             |
|            |     > jurisdiction has established a higher percentage, |
|            |     > in which case, apply the specified percentage for |
|            |     > that jurisdiction.                                |
|            |                                                         |
|            |     > A key to the geographic regions is listed in the  |
|            |     > following tables.                                 |
+------------+---------------------------------------------------------+

+-------+--------------+--------------+---------------+---------------+
| > **  |              |              |               |               |
| Table |              |              |               |               |
| > of  |              |              |               |               |
| > Res |              |              |               |               |
| idual |              |              |               |               |
| > In  |              |              |               |               |
| comes |              |              |               |               |
| > by  |              |              |               |               |
| > Reg |              |              |               |               |
| ion** |              |              |               |               |
|       |              |              |               |               |
| For   |              |              |               |               |
| loan  |              |              |               |               |
| am    |              |              |               |               |
| ounts |              |              |               |               |
| of    |              |              |               |               |
| \$7   |              |              |               |               |
| 9,999 |              |              |               |               |
| and   |              |              |               |               |
| below |              |              |               |               |
+-------+--------------+--------------+---------------+---------------+
| F     | Northeast    | Midwest      | South         | West          |
| amily |              |              |               |               |
| Size  |              |              |               |               |
+-------+--------------+--------------+---------------+---------------+
| 1     | \$390        | \$382        | \$382         | \$425         |
+-------+--------------+--------------+---------------+---------------+
| 2     | \$654        | \$641        | \$641         | \$713         |
+-------+--------------+--------------+---------------+---------------+
| 3     | \$788        | \$772        | \$772         | \$859         |
+-------+--------------+--------------+---------------+---------------+
| 4     | \$888        | \$868        | \$868         | \$967         |
+-------+--------------+--------------+---------------+---------------+
| 5     | \$921        | \$902        | \$902         | \$1,004       |
+-------+--------------+--------------+---------------+---------------+
| over  | Add \$75 for |              |               |               |
| 5     | each         |              |               |               |
|       | additional   |              |               |               |
|       | member up to |              |               |               |
|       | a family of  |              |               |               |
|       | 7.           |              |               |               |
+-------+--------------+--------------+---------------+---------------+

Continued on next page

9\. How to Complete VA Form 26-6393, Loan Analysis, Continued

  -----------------------------------------------------------------------
  e\. Item 44, Balance Available for Family Support
  (continued)(continued)

  -----------------------------------------------------------------------

+-------+--------------+--------------+---------------+---------------+
| > **  |              |              |               |               |
| Table |              |              |               |               |
| > of  |              |              |               |               |
| > Res |              |              |               |               |
| idual |              |              |               |               |
| > In  |              |              |               |               |
| comes |              |              |               |               |
| > by  |              |              |               |               |
| > Reg |              |              |               |               |
| ion** |              |              |               |               |
|       |              |              |               |               |
| For   |              |              |               |               |
| loan  |              |              |               |               |
| am    |              |              |               |               |
| ounts |              |              |               |               |
| of    |              |              |               |               |
| \$8   |              |              |               |               |
| 0,000 |              |              |               |               |
| and   |              |              |               |               |
| above |              |              |               |               |
+-------+--------------+--------------+---------------+---------------+
| F     | Northeast    | Midwest      | South         | West          |
| amily |              |              |               |               |
| Size  |              |              |               |               |
+-------+--------------+--------------+---------------+---------------+
| 1     | \$450        | \$441        | \$441         | \$491         |
+-------+--------------+--------------+---------------+---------------+
| 2     | \$755        | \$738        | \$738         | \$823         |
+-------+--------------+--------------+---------------+---------------+
| 3     | \$909        | \$889        | \$889         | \$990         |
+-------+--------------+--------------+---------------+---------------+
| 4     | \$1,025      | \$1,003      | \$1,003       | \$1,117       |
+-------+--------------+--------------+---------------+---------------+
| 5     | \$1062       | \$1,039      | \$1,039       | \$1,158       |
+-------+--------------+--------------+---------------+---------------+
| over  | Add \$80 for |              |               |               |
| 5     | each         |              |               |               |
|       | additional   |              |               |               |
|       | member up to |              |               |               |
|       | a family of  |              |               |               |
|       | 7.           |              |               |               |
+-------+--------------+--------------+---------------+---------------+

+-----------+--------------------+------------------+-----------------+
| Key to    |                    |                  |                 |
| G         |                    |                  |                 |
| eographic |                    |                  |                 |
| Regions   |                    |                  |                 |
| Used in   |                    |                  |                 |
| the       |                    |                  |                 |
| Preceding |                    |                  |                 |
| Tables    |                    |                  |                 |
+-----------+--------------------+------------------+-----------------+
| Northeast | Connecticut        | New Hampshire    | Pennsylvania    |
|           |                    |                  |                 |
|           | Maine              | New Jersey       | Rhode Island    |
|           |                    |                  |                 |
|           | Massachusetts      | New York         | Vermont         |
+-----------+--------------------+------------------+-----------------+
| Midwest   | Illinois           | Michigan         | North Dakota    |
|           |                    |                  |                 |
|           | Indiana            | Minnesota        | Ohio            |
|           |                    |                  |                 |
|           | Iowa               | Missouri         | South Dakota    |
|           |                    |                  |                 |
|           | Kansas             | Nebraska         | Wisconsin       |
+-----------+--------------------+------------------+-----------------+
| South     | Alabama            | Kentucky         | Puerto Rico     |
|           |                    |                  |                 |
|           | Arkansas           | Louisiana        | South Carolina  |
|           |                    |                  |                 |
|           | Delaware           | Maryland         | Tennessee       |
|           |                    |                  |                 |
|           | District of        | Mississippi      | Texas           |
|           | Columbia           |                  |                 |
|           |                    | North Carolina   | Virginia        |
|           | Florida            |                  |                 |
|           |                    | Oklahoma         | West Virginia   |
|           | Georgia            |                  |                 |
+-----------+--------------------+------------------+-----------------+
| West      | Alaska             | Hawaii           | New Mexico      |
|           |                    |                  |                 |
|           | Arizona            | Idaho            | Oregon          |
|           |                    |                  |                 |
|           | California         | Montana          | Utah            |
|           |                    |                  |                 |
|           | Colorado           | Nevada           | Washington      |
|           |                    |                  |                 |
|           |                    |                  | Wyoming         |
+-----------+--------------------+------------------+-----------------+

Continued on next page

9\. How to Complete VA Form 26-6393, Loan Analysis, Continued

+------------+---------------------------------------------------------+
| #####      | > VA's debt-to-income ratio is a ratio of total monthly |
|  f. Item 4 | > debt payments (housing expense, installment debts,    |
| 5, Debt-to | > and other debt) to gross monthly income.              |
| -Income Ra |                                                         |
| tio {#f.-i | > **Add:** Items 15 + 16 + 17 + 18 +20 +40 = Debt       |
| tem-45-deb |                                                         |
| t-to-incom | > **Add**: Items 31 + 38\* = Income                     |
| e-ratio .u |                                                         |
| nnumbered} | > **Divide**: Debt ÷ Income = Debt-to-Income Ratio      |
|            |                                                         |
|            | > **Round**: To the nearest 2 digits                    |
|            |                                                         |
|            | > The "Debt-to-Income Ratio" heading in section 10 of   |
|            | > this chapter contains special procedures to apply if  |
|            | > the ratio exceeds 41 percent.                         |
|            |                                                         |
|            | > \*Tax-free income may be "grossed up" for purposes of |
|            | > calculating the debt-to-income ratio only (**not**    |
|            | > residual income). This is a tool that may be used to  |
|            | > lower the debt ratio for veterans who clearly qualify |
|            | > for the loan. "Grossing up" involves adjusting the    |
|            | > income upward to a pre-tax or gross income amount     |
|            | > which, after deducting state and Federal income       |
|            | > taxes, equals the tax-exempt income. Use current      |
|            | > income tax withholding tables to determine an amount  |
|            | > which can be prudently employed to adjust the         |
|            | > borrower's actual income. Do not add non-taxable      |
|            | > income to taxable income before "grossing up."        |
|            |                                                         |
|            | > Tax-free income includes certain military allowances, |
|            | > child support payments, workers' compensation         |
|            | > benefits, disability retirement payments, and certain |
|            | > types of public assistance payments. Verify that the  |
|            | > income is indeed tax-free before "grossing up."       |
|            |                                                         |
|            | > If "grossing up" is used, indicate such and provide   |
|            | > the "grossed up" ratio in item 47, "Remarks."         |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| #          | > Indicate whether the applicant (and spouse, if        |
| #### g. It | > applicable) is a satisfactory or unsatisfactory       |
| em 46, Pas | > credit risk based on a complete analysis of credit    |
| t Credit R | > data.                                                 |
| ecord {#g. |                                                         |
| -item-46-p |                                                         |
| ast-credit |                                                         |
| -record .u |                                                         |
| nnumbered} |                                                         |
+------------+---------------------------------------------------------+

#### 10. How to Analyze the Information on VA Form 26-6393

+------------+---------------------------------------------------------+
| ##### C    | > September 15, 2004, Change 4                          |
| hange Date | >                                                       |
|            | > This section has been changed to create subsection    |
|            | > lettering.                                            |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ####       | > VA's minimum residual incomes (balance available for  |
| # a. Resid | > family support) are a guide. They should not          |
| ual Income | > automatically trigger approval or rejection of a      |
|            | > loan. Instead, consider residual income in            |
|            | > conjunction with all other credit factors.            |
|            | >                                                       |
|            | > An obviously inadequate residual income alone can be  |
|            | > a basis for disapproving a loan.                      |
|            | >                                                       |
|            | > If residual income is marginal, look to other         |
|            | > indicators such as the applicant's credit history,    |
|            | > and in particular, whether and how the applicant has  |
|            | > previously handled similar housing expense.           |
|            | >                                                       |
|            | > Consider whether the purchase price of the property   |
|            | > may affect family expense levels. For example, a      |
|            | > family purchasing in a higher priced neighborhood may |
|            | > feel a need to incur higher-than-average expenses to  |
|            | > support a lifestyle comparable to that in their       |
|            | > environment, whereas a substantially lower priced     |
|            | > home purchase may not compel such expenditures.       |
|            | >                                                       |
|            | > Also consider the ages of the applicant's dependents  |
|            | > in determining the adequacy of residual income.       |
+------------+---------------------------------------------------------+

Continued on next page

10\. How to Analyze the Information on VA Form 26-6393, Continued

+------------+---------------------------------------------------------+
| ##### b.   | > VA's debt-to-income ratio is a ratio of total monthly |
| Debt-to-In | > debt payments (housing expense, installment debts,    |
| come Ratio | > and so on) to gross monthly income. It is a guide     |
|            | > and, as an underwriting factor, it is secondary to    |
|            | > the residual income. It should not automatically      |
|            | > trigger approval or rejection of a loan. Instead,     |
|            | > consider the ratio in conjunction with all other      |
|            | > credit factors.                                       |
|            | >                                                       |
|            | > A ratio greater than 41 percent requires close        |
|            | > scrutiny unless:                                      |
|            |                                                         |
|            | -   the ratio is greater than 41 percent solely due to  |
|            |     the existence of tax-free income (Put notation      |
|            |     regarding the tax-free income in the loan file or   |
|            |     calculate an adjusted, smaller ratio based on       |
|            |     "grossing up" of the tax-free income.), or          |
|            |                                                         |
|            | -   residual income exceeds the guideline by at least   |
|            |     20 percent.                                         |
|            |                                                         |
|            | > ***Loans Closed Automatically with Ratio Greater than |
|            | > 41 percent***                                         |
|            | >                                                       |
|            | > Include a statement justifying the reasons for        |
|            | > approval, signed by the underwriter's supervisor,     |
|            | > unless residual income exceeds the guideline by at    |
|            | > least 20 percent. The statement must:                 |
|            |                                                         |
|            | -   not be perfunctory, or                              |
|            |                                                         |
|            | -   list the compensating factors justifying approval   |
|            |     of the loan.                                        |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ###        | > A poor credit history alone is a basis for            |
| ## c. Cred | > disapproving a loan.                                  |
| it History | >                                                       |
|            | > If credit history is marginal, look to other          |
|            | > indicators such as residual income.                   |
+------------+---------------------------------------------------------+

Continued on next page

10\. How to Analyze the Information on VA Form 26-6393, Continued

+------------+---------------------------------------------------------+
| ##### d.   | > Compensating factors may affect the loan decision.    |
| Compensati | > These factors are especially important when reviewing |
| ng Factors | > loans which are marginal with respect to residual     |
|            | > income or debt-to-income ratio. They cannot be used   |
|            | > to compensate for unsatisfactory credit.              |
|            | >                                                       |
|            | > Valid compensating factors should represent unusual   |
|            | > strengths rather than mere satisfaction of basic      |
|            | > program requirements. For example, the fact that an   |
|            | > applicant has sufficient assets for closing purposes, |
|            | > or meets the residual income guideline, is not a      |
|            | > compensating factor.                                  |
|            | >                                                       |
|            | > Valid compensating factors should logically be able   |
|            | > to compensate (to some extent) for the identified     |
|            | > weakness in the loan. For example, significant liquid |
|            | > assets may compensate for a residual income shortfall |
|            | > whereas long-term employment would not.               |
|            | >                                                       |
|            | > Compensating factors include, but are not limited to  |
|            | > the following:                                        |
|            |                                                         |
|            | -   excellent credit history                            |
|            |                                                         |
|            | -   conservative use of consumer credit                 |
|            |                                                         |
|            | -   minimal consumer debt                               |
|            |                                                         |
|            | -   long-term employment                                |
|            |                                                         |
|            | -   significant liquid assets                           |
|            |                                                         |
|            | -   sizable down payment                                |
|            |                                                         |
|            | -   the existence of equity in refinancing loans        |
|            |                                                         |
|            | -   little or no increase in shelter expense            |
|            |                                                         |
|            | -   military benefits                                   |
|            |                                                         |
|            | -   satisfactory homeownership experience               |
|            |                                                         |
|            | -   high residual income                                |
|            |                                                         |
|            | -   low debt-to-income ratio                            |
|            |                                                         |
|            | -   tax credits for child care, and                     |
|            |                                                         |
|            | -   tax benefits of home ownership.                     |
+------------+---------------------------------------------------------+

Continued on next page

10\. How to Analyze the Information on VA Form 26-6393, Continued

+------------+---------------------------------------------------------+
| ####       | > Closely scrutinize a case in which the applicant will |
| # e. Compa | > be paying significantly higher shelter expenses than  |
| re What Sh | > he or she currently pays. Consider the:               |
| elter Expe |                                                         |
| nses will  | -   ability of the applicant and spouse to accumulate   |
| be to What |     liquid assets; such as cash and bonds, and          |
|  Applicant |                                                         |
|  Pays Now  | -   amount of debts incurred while paying a lesser      |
|            |     amount for shelter.                                 |
|            |                                                         |
|            | > If an application shows little or no capital reserves |
|            | > and excessive obligations, it may not be reasonable   |
|            | > to conclude that a substantial increase in shelter    |
|            | > expenses can be absorbed.                             |
+------------+---------------------------------------------------------+

#### 11. Examples of Underwriting Deficiencies

+------------+---------------------------------------------------------+
| ##### C    | > September 15, 2004, Change 4                          |
| hange Date | >                                                       |
|            | > This section has been changed to create subsection    |
|            | > lettering.                                            |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| #####      | > Because of the high loan-to-value ratios of           |
| a. Purpose | > VA-guaranteed loans, it is critical that underwriters |
|            | > use sound judgment. The underwriting deficiencies     |
|            | > listed in this section represent a sample of actual   |
|            | > deficiencies found on VA loans that went into         |
|            | > default. The deficiencies were of such significance   |
|            | > that many of the loans should **not** have been made. |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ###        | > Deficiencies included:                                |
| ## b. Inad |                                                         |
| equate Dev | -   failing to compare documented information with the  |
| elopment o |     applicant's initial application                     |
| f Credit I |                                                         |
| nformation | -   failing to question and investigate obvious         |
|            |     discrepancies                                       |
|            |                                                         |
|            | ```{=html}                                              |
|            | <!-- -->                                                |
|            | ```                                                     |
|            | -   in the number of dependents or household size, and  |
|            |                                                         |
|            | -   between actual year-to-date average monthly         |
|            |     earnings and the income claimed on the loan         |
|            |     application                                         |
|            |                                                         |
|            | ```{=html}                                              |
|            | <!-- -->                                                |
|            | ```                                                     |
|            | -   failing to question multiple Social Security        |
|            |     numbers for an applicant                            |
|            |                                                         |
|            | -   failing to determine future plans of an active-duty |
|            |     serviceperson whose separation from service is      |
|            |     imminent, and                                       |
|            |                                                         |
|            | -   accepting an explanation for a bad credit history   |
|            |     without documenting the circumstances alleged to    |
|            |     have caused the credit problem, judgment, or        |
|            |     bankruptcy.                                         |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### c. M | > Deficiencies included failure:                        |
| issing Doc |                                                         |
| umentation | -   to inquire about and document the payment history   |
|            |     on previous home loans, including prior VA loans,   |
|            |     and                                                 |
|            |                                                         |
|            | -   to obtain documentation of employment history       |
|            |     during the previous two years.                      |
+------------+---------------------------------------------------------+

Continued on next page

11\. Examples of Underwriting Deficiencies, Continued

+------------+---------------------------------------------------------+
| ###        | > Deficiencies included:                                |
| ## d. Veri |                                                         |
| fication a | -   requiring the veteran to sign partially completed   |
| nd Procedu |     or blank forms                                      |
| ral Errors |                                                         |
|            | -   permitting income or asset deposit information to   |
|            |     be hand carried by the applicant, real estate/sales |
|            |     agent, or a party other than the lender's           |
|            |     specifically-designated employee                    |
|            |                                                         |
|            | -   addressing verification forms to an individual      |
|            |     chosen by the applicant rather than to the          |
|            |     employer's personnel or payroll department, and     |
|            |                                                         |
|            | -   obtaining multiple/revised credit reports without   |
|            |     validating the need for the subsequent reports.     |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| #          | > Deficiencies included:                                |
| #### e. In |                                                         |
| come Analy | -   showing that an applicant is a salaried employee    |
| sis Errors |     when, in fact, the applicant works solely on a      |
|            |     commission basis, is a contract employee, or is     |
|            |     actually self-employed                              |
|            |                                                         |
|            | -   failing to use net profit or net income from        |
|            |     Schedule C of IRS Form 1040 rather than the gross   |
|            |     income of an applicant who is self-employed         |
|            |                                                         |
|            | -   using short-term, temporary, or sporadic income to  |
|            |     qualify an applicant for a loan, and                |
|            |                                                         |
|            | -   qualifying a marginal applicant for a loan by using |
|            |     a buydown or graduated payment mortgage without     |
|            |     establishing that the applicant's income will keep  |
|            |     pace with the scheduled increase in mortgage        |
|            |     payments. This is especially important in times of  |
|            |     low inflation and stagnant or declining real estate |
|            |     markets.                                            |
|            |                                                         |
|            | Examples of unreliable income sources include:          |
|            |                                                         |
|            | -   overtime pay in an industry or area that is         |
|            |     experiencing an economic slowdown or decline        |
|            |                                                         |
|            | -   income from a second job even though the applicant  |
|            |     does not have a record of steadily working two jobs |
|            |                                                         |
|            | -   rental income even though the applicant does not    |
|            |     have verified experience as a landlord, and         |
|            |                                                         |
|            | -   poorly documented income from self-employment.      |
+------------+---------------------------------------------------------+

Continued on next page

11\. Examples of Underwriting Deficiencies, Continued

+------------+---------------------------------------------------------+
| #          | > Deficiencies included:                                |
| #### f. Ot |                                                         |
| her Analys | -   failing to consider                                 |
| is Errors  |                                                         |
|  {#f.-othe | ```{=html}                                              |
| r-analysis | <!-- -->                                                |
| -errors .u | ```                                                     |
| nnumbered} | -   changes in marital status or household size after   |
|            |     application and prior to closing, and               |
|            |                                                         |
|            | -   pay statements showing deductions to creditors that |
|            |     are not shown on the application, credit reports,   |
|            |     or deposit verifications                            |
|            |                                                         |
|            | ```{=html}                                              |
|            | <!-- -->                                                |
|            | ```                                                     |
|            | -   approving a loan solely on the basis of an          |
|            |     emotional appeal from the applicant or spouse, the  |
|            |     sales agent, seller, or other interested party. A   |
|            |     decision or an inclination to reject a loan         |
|            |     application should **not** be changed unless there  |
|            |     is new and compelling information available to      |
|            |     justify approving the loan.                         |
|            |                                                         |
|            | -   approving high debt-to-income ratio loans with few  |
|            |     or no valid compensating factors                    |
|            |                                                         |
|            | -   using gift letters to offset past due obligations,  |
|            |     pay off debts, and so on, without consideration of  |
|            |     the credit risk implications of the past due        |
|            |     obligations                                         |
|            |                                                         |
|            | -   ignoring debts, judgments, bankruptcies, alimony or |
|            |     child support obligations because they don't appear |
|            |     on the credit report, and                           |
|            |                                                         |
|            | -   failing to reconcile a large increase in shelter    |
|            |     expense with an undemonstrated ability to           |
|            |     accumulate cash assets.                             |
+------------+---------------------------------------------------------+