**Underwriting Standards, Processing Procedures,**

**and Lender Responsibility and Certification**

**§36.4337 Underwriting standards, processing procedures, lender
responsibility**

**and lender certification.**

\(a\) *Use of standards*. The standards contained in paragraphs (c)
through (j) of this section will be used to determine whether the
veteran's present and anticipated income and expenses, and credit
history are satisfactory. These standards do not apply to loans
guaranteed pursuant to 38 U.S.C. 3710(a)(8) except for cases where the
Secretary is required to approve the loan in advance under §36.4306a.
(Authority: 38 U.S.C. 3703, 3710)

\(b\) *Waiver of standards*. Use of the standards in paragraphs (c)
through (j) of this section for underwriting home loans will be waived
only in extraordinary circumstances when the Secretary determines,
considering the totality of circumstances, that the veteran is a
satisfactory credit risk.

\(c\) *Methods*. The two primary underwriting tools that will be used in
determining the adequacy of the veteran's present and anticipated income
are debt-to-income ratio and residual income analysis. They are
described in paragraphs (d) through (f) of this section. Ordinarily, to
qualify for a loan, the veteran must meet both standards. Failure to
meet one standard, however, will not automatically disqualify a veteran.
The following shall apply to cases where a veteran does not meet both
standards:

\(1\) If the debt-to-income ratio is 41 percent or less, and the veteran
does not meet the residual income standard, the loan may be approved
with justification, by the underwriter's supervisor, as set out in
paragraph (c)(4) of this section.

\(2\) If the debt-to-income ratio is greater than 41 percent (unless it
is larger due solely to the existence of tax-free income which should be
noted in the loan file), the loan may be approved with justification, by
the underwriter's supervisor, as set out in paragraph (c)(4) of this
section.

\(3\) If the ratio is greater than 41 percent and the residual income
exceeds the guidelines by at least 20 percent, the second level review
and statement of justification are not required.

\(4\) In any case described by paragraphs (c)(1) and (c)(2) of this
section, the lender must fully justify the decision to approve the loan
or submit the loan to the Secretary for prior approval in writing. The
lender's statement must not be perfunctory, but should address the
specific compensating factors, as set forth in paragraph (c)(5) of this
section, justifying the approval of the loan. The statement must be
signed by the underwriter's supervisor. It must be stressed that the
statute requires not only consideration of a veteran's present and
anticipated income and expenses, but also that the veteran be a
satisfactory credit risk. Therefore, meeting both the debt-to-income
ratio and residual income standards does not mean that the loan is
automatically approved. It is the lender's responsibility to base the
loan approval or disapproval on all the factors present for any
individual veteran. The veteran's credit must be evaluated based on the
criteria set forth in paragraph (g) of this section as well as a variety
of compensating factors that should be evaluated.

\(5\) The following are examples of acceptable compensating factors to
be considered in the course of underwriting a loan:

> \(i\) Excellent long-term credit;
>
> \(ii\) Conservative use of consumer credit;
>
> \(iii\) Minimal consumer debt;
>
> \(iv\) Long-term employment;
>
> \(v\) Significant liquid assets;
>
> \(vi\) Downpayment or the existence of equity in refinancing loans;
>
> \(vii\) Little or no increase in shelter expense;
>
> \(viii\) Military benefits;
>
> \(ix\) Satisfactory homeownership experience;
>
> \(x\) High residual income;
>
> \(xi\) Low debt-to-income ratio;
>
> \(xii\) Tax credits of a continuing nature, such as tax credits for
> child care; and
>
> \(xiii\) Tax benefits of home ownership.

\(6\) The list in paragraph (c)(5) of this section is not exhaustive and
the items are not in any priority order. Valid compensating factors
should represent unusual strengths rather than mere satisfaction of
basic program requirements. Compensating factors must be relevant to the
marginality or weakness.

\(d\) *Debt-to-income ratio*. A debt-to-income ratio that compares the
veteran's anticipated monthly housing expense and total monthly
obligations to his or her stable monthly income will be computed to
assist in the assessment of the potential risk of the loan. The ratio
will be determined by taking the sum of the monthly Principal, Interest,
Taxes and Insurance (PITI) of the loan being applied for, homeowners and
other assessments such as special assessments, condominium fees,
homeowners association fees, etc., and any long-term obligations divided
by the total of gross salary or earnings and other compensation or
income. The ratio should be rounded to the nearest two digits; e.g.,
35.6 percent would be rounded to 36 percent. The standard is 41 percent
or less. If the ratio is greater than 41 percent, the steps cited in
paragraphs (c)(1) through (c)(6) of this section apply.

\(e\) *Residual income guidelines*. The guidelines provided in this
paragraph for residual income will be used to determine whether the
veteran's monthly residual income will be adequate to meet living
expenses after estimated monthly shelter expenses have been paid and
other monthly obligations have been met. All members of the household
must be included in determining if the residual income is sufficient.
They must be counted even if the veteran's spouse is not joining in
title or on the note, or if there are any other individuals depending on
the veteran for support, such as children from a spouse's prior marriage
who are not the veteran's legal dependents. It is appropriate, however,
to reduce the number of members of a household to be counted for
residual income purposes if there is sufficient verified income not
otherwise included in the loan analysis, such as child support being
regularly received as discussed in paragraph (e)(4) of this section. In
the case of a spouse not to be obligated on the note, verification that
he/she has stable and reliable employment as discussed in paragraph
(f)(3) of this section would allow not counting the spouse in
determining the sufficiency of the residual income. The guidelines for
residual income are based on data supplied in the Consumer Expenditure
Survey (CES) published by the Department of Labor's Bureau of Labor
Statistics. Regional minimum incomes have been developed for loan
amounts up to \$79,999 and for loan amounts of \$80,000 and above. It is
recognized that the purchase price of the property may affect family
expenditure levels in individual cases. This factor may be given
consideration in the final determination in individual loan analyses.
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. It should
also be clearly understood from this information that no single factor
is a final determinant in any applicant's qualification for a
VA-guaranteed loan. Once the residual income has been established, other
important factors must be examined. One such consideration is the amount
being paid currently for rental or housing expenses. If the proposed
shelter expense is materially in excess of what is currently being paid,
the case may require closer scrutiny. In such cases, consideration
should be given to the ability of the borrower and spouse to accumulate
liquid assets, such as cash and bonds, and to the amount of debts
incurred while paying a lesser amount for shelter. For example, if an
application indicates 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. Another factor of prime
importance is the applicant's manner of meeting obligations. A poor
credit history alone is a basis for disapproving a loan, as is an
obviously inadequate income. When one or the other is marginal, however,
the remaining aspect must be closely examined to assure that the loan
applied for will not exceed the applicant's ability or capacity to
repay. Therefore, it is important to remember that the figures provided
below for residual income are to be used as a guide and should be used
in conjunction with the steps outlined in paragraphs (c) through (j) of
this section. The residual income guidelines are as follows:

\(1\) Table of residual incomes by region (for loan amounts of \$79,999
and below):

**Table of Residual Incomes by Region**

\[For loan amounts of \$ 79,999 and below\]

Family size\* Northeast Midwest South West

> 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

\*For families with more than five members, add \$ 75 for each
additional member up to a family of seven. "Family" includes all members
of the household.

\(2\) Table of residual incomes by region (for loan amounts of \$80,000
and above):

**Table of Residual Incomes by Region**

\[For loan amounts of \$ 80,000 and above\]

Family size\* Northeast Midwest South West

> 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 1,062 1,039 1,039 1,158
>
> \* For families with more than five members, add \$ 80 for each
> additional member up to a family of seven. "Family" includes all
> members of the household.

\(3\) Geographic regions for residual income guidelines:

> Northeast---Connecticut, Maine, Massachusetts, New Hampshire, New
> Jersey, New York, Pennsylvania, Rhode Island and Vermont;
>
> Midwest---Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota,
> Missouri, Nebraska, North Dakota, Ohio, South Dakota and Wisconsin;
>
> South---Alabama, Arkansas, Delaware, District of Columbia, Florida,
> Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina,
> Oklahoma, Puerto Rico, South Carolina, Tennessee, Texas, Virginia,
> West Virginia;
>
> West---Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana,
> Nevada, New Mexico, Oregon, Utah, Washington and Wyoming.

\(4\) *Military adjustments*. For loan applications involving an
active-duty servicemember or military retiree, the residual income
figures will be reduced by a minimum of 5 percent if there is a clear
indication that the borrower or spouse will continue to receive the
benefits resulting from the use of facilities on a nearby military base.
(This reduction applies to tables in paragraph (e) of this section.)

\(f\) *Stability and reliability of income*. Only stable and reliable
income of the veteran and spouse can be considered in determining
ability to meet mortgage payments. Income can be considered stable and
reliable if it can be concluded that it will continue during the
foreseeable future.

\(1\) *Verification*. Income of the borrower and spouse which is derived
from employment and which is considered in determining the family's
ability to meet the mortgage payments, payments on debts and other
obligations, and other expenses must be verified. If the spouse is
employed and will be contractually obligated on the loan, the combined
income of both the veteran and spouse is considered when the income of
the veteran alone is not sufficient to qualify for the amount of the
loan sought. In other than community property states, if the spouse will
not be contractually obligated on the loan, Regulation B (12 CFR part
202), promulgated by the Federal Reserve Board pursuant to the Equal
Credit Opportunity Act, prohibits any request for, or consideration of,
information concerning the spouse (including income, employment, assets,
or liabilities), except that if the applicant is relying on alimony,
child support, or maintenance payments from a spouse or former spouse as
a basis for repayment of the loan, information concerning such spouse or
former spouse may be requested and considered (see paragraph (f)(4) of
this section). In community property states, information concerning a
spouse may be requested and considered in the same manner as that for
the applicant. The standards applied to income of the veteran are also
applicable to that of the spouse. There can be no discounting of income
on account of sex, marital status, or any other basis prohibited by the
Equal Credit Opportunity Act. Income claimed by an applicant that is not
or cannot be verified cannot be considered when analyzing the loan. If
the veteran or spouse has been employed by a present employer for less
than 2 years, a 2-year history covering prior employment, schooling, or
other training must be secured. Any periods of unemployment must be
explained. Employment verifications and pay stubs must be no more than
120 days (180 days for new construction) old to be considered valid. For
loans closed automatically, this requirement will be considered
satisfied if the date of the employment verification is within 120 days
(180 days for new construction) of the date the note is signed. For
prior approval loans, this requirement will be considered satisfied if
the verification of employment is dated within 120 days of the date the
application is received by VA.

\(2\) *Active-duty, Reserve, or National Guard applicants*.

\(i\) In the case of an active-duty applicant, a military Leave &
Earnings Statement is required and will be used instead of an employment
verification. The statement must be no more than 120 days old (180 days
for new construction) and must be the original or a lender-certified
copy of the original. For loans closed automatically, this requirement
is satisfied if the date of the Leave & Earnings Statement is within 120
days (180 days for new construction) of the date the note is signed. For
prior approval loans, this requirement will be considered satisfied if
the verification of employment is dated within 120 days of the date the
application is received by VA.

\(ii\) For servicemembers within 12 months of release from active duty,
or members of the Reserves or National Guard within 12 months of
release, one of the following is also required:

\(A\) Documentation that the servicemember has in fact already
reenlisted or extended his/her period of active duty or Reserve or
National Guard service to a date beyond the 12-month period following
the projected closing of the loan.

\(B\) Verification of a valid offer of local civilian employment
following release from active duty. All data pertinent to sound
underwriting procedures (date employment will begin, earnings, etc.)
must be included.

\(C\) A statement from the servicemember that he/she intends to reenlist
or extend his/her period of active duty or Reserve or National Guard
service to a date beyond the 12 month period following the projected
loan closing date, and a statement from the servicemember's commanding
officer confirming that the servicemember is eligible to reenlist or
extend his/her active duty or Reserve or National Guard service as
indicated and that the commanding officer has no reason to believe that
such reenlistment or extension will not be granted.

\(D\) Other unusually strong positive underwriting factors, such as a
downpayment of at least 10 percent, significant cash reserves, or 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
servicemember or member of the Reserves or National Guard is needed to
qualify.

\(iii\) Each active-duty member who applies for a loan must be counseled
through the use of VA Form 26-0592, Counseling Checklist for Military
Homebuyers. Lenders must submit a signed and dated VA Form 26-0592 with
each prior approval loan application or automatic loan report involving
a borrower on active duty.

\(3\) *Income reliability*. Income received by the borrower and spouse
is to be used only if it can be concluded that the income will continue
during the foreseeable future and, thus, should be properly considered
in determining ability to meet the mortgage payments. If an employer
puts N/A or otherwise declines to complete a verification of employment
statement regarding the probability of continued employment, no further
action is required of the lender. Reliability will be determined based
on the duration of the borrower's current employment together with his
or her overall documented employment history. There can be no
discounting of income solely because it is derived from an annuity,
pension or other retirement benefit, or from part-time employment.
However, unless income from overtime work and part-time or second jobs
can be accorded a reasonable likelihood that it is continuous and will
continue in the foreseeable future, such income should not be used.
Generally, the reliability of such income cannot be demonstrated unless
the income has continued for 2 years. The hours of duty and other work
conditions of the applicant's primary job, and the period of time in
which the applicant was employed under such arrangement, must be such as
to permit a clear conclusion as to a good probability that overtime or
part-time or secondary employment can and will continue. Income from
overtime work and part-time jobs not eligible for inclusion as primary
income may, if properly verified for at least 12 months, be used to
offset the payments due on debts and obligations of an intermediate
term, i.e., 6 to 24 months. Such income must be described in the loan
file. The amount of any pension or compensation and other income, such
as dividends from stocks, interest from bonds, savings accounts, or
other deposits, rents, royalties, etc., will be used as primary income
if it is reasonable to conclude that such income will continue in the
foreseeable future. Otherwise, it may be used only to offset
intermediate-term debts, as described in this paragraph. Also, the
likely duration of certain military allowances cannot be determined and,
therefore, will be used only to offset intermediate-term debts, as
described in this paragraph. Such allowances are: Pro-pay, flight or
hazard pay, and overseas or combat pay, all of which are subject to
periodic review and/or testing of the recipient to ascertain whether
eligibility for such pay will continue. Only if it can be shown that
such pay has continued for a prolonged period and can be expected to
continue because of the nature of the recipient's assigned duties, will
such income be considered as primary income. For instance, flight pay
verified for a pilot can be regarded as probably continuous and, thus,
should be added to the base pay. Income derived from service in the
Reserves or National Guard may be used if the applicant has served in
such capacity for a period of time sufficient to evidence good
probability that such income will continue beyond 12 months. The total
period of active and reserve service may be helpful in this regard.
Otherwise, such income may be used to offset intermediate-term debts.
There are a number of additional income sources whose contingent nature
precludes their being considered as available for repayment of a
long-term mortgage obligation. Temporary income items such as VA
educational allowances and unemployment compensation do not represent
stable and reliable income and will not be taken into consideration in
determining the ability of the veteran to meet the income requirement of
the governing law. As required by the Equal Opportunity Act Amendments
of 1976, Public Law 94-239, income from public assistance programs is
used to qualify for a loan if it can be determined that the income will
probably continue for 3 years or more.

\(4\) *Tax-exempt income*. Special consideration can be given to
verified nontaxable income once it has been established that such income
is likely to continue (and remain untaxed) into the foreseeable future.
Such income includes certain military allowances, child support
payments, workers' compensation benefits, disability retirement payments
and certain types of public assistance payments. In such cases, current
income tax tables may be used to determine an amount which can be
prudently employed to adjust the borrower's actual income. This adjusted
or "grossed up" income may be used to calculate the monthly
debt-to-income ratio, provided the analysis is documented. Only the
borrower's actual income may be used to calculate the residual income.
Care should be exercised to ensure that the income is in fact
tax-exempt.

\(5\) *Alimony, child support, maintenance, workers' compensation,
foster care payments*.

\(i\) If an applicant chooses to reveal income from alimony, child
support or maintenance payments (after first having been informed that
any such disclosure is voluntary pursuant to the Federal Reserve Board's
Regulation B), such payments are considered as income to the extent that
the payments are likely to be consistently made. Factors to be
considered in determining the likelihood of consistent payments include,
but are not limited to: Whether the payments are received pursuant to a
written agreement or court decree; the length of time the payments have
been received; the regularity of receipt; the availability of procedures
to compel payment; and the creditworthiness of the payor, including the
credit history of the payor when available under the Fair Credit
Reporting Act or other applicable laws. However, the Fair Credit
Reporting Act (15 U.S.C. 1681(b)) limits the permissible purposes for
which credit reports may be ordered, in the absence of written
instructions of the consumer to whom the report relates, to business
transactions involving the subject of the credit report or extensions of
credit to the subject of the credit report.

\(ii\) If the applicant chooses to reveal income related to workers'
compensation, it will be considered as income to the extent it can be
determined such income will continue.

\(iii\) Income received specifically for the care of any foster
child(ren) may be counted as income if documented. Generally, however,
such 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.

\(6\) *Military quarters allowance*. With respect to off-base housing
(quarters) allowances for service personnel on active duty, it is the
policy of the Department of Defense to utilize available on-base housing
when possible. In order for a quarters allowance to be considered as
continuing income, it is necessary that the applicant furnish written
authorization from his or her commanding officer for off-base housing.
This authorization should verify that quarters will not be made
available and that the individual should make permanent arrangements for
nonmilitary housing. A Department of Defense form, DD Form 1747, Status
of Housing Availability, is used by the Family Housing Office to advise
personnel regarding family housing. The applicant's quarters allowance
cannot be considered unless item b (Permanent) or d is completed on DD
Form 1747, dated October 1990. Of course, if the applicant's income less
quarters allowance is sufficient, there is no need for assurance that
the applicant has permission to occupy nonmilitary housing provided that
a determination can be made that the occupancy requirements of the law
will be met. Also, authorization to obtain off-base housing will not be
required when certain duty assignments would clearly qualify service
personnel with families for quarters allowance. For instance, off-base
housing authorizations need not be obtained for service personnel
stationed overseas who are not accompanied by their families, recruiters
on detached duty, or military personnel stationed in areas where no
on-base housing exists. In any case in which no off-base housing
authorization is obtained, an explanation of the circumstances
justifying its omission must be included with the loan application
except when it has been established by the VA facility of jurisdiction
that the waiting lists for on-base housing are so long that it is
improbable that individuals desiring to purchase off-base housing would
be precluded from doing so in the foreseeable future. If stations make
such a determination, a release shall be issued to inform lenders.

\(7\) *Automobile (or similar) allowance*. Generally, automobile
allowances are paid to cover specific expenses related to an applicant's
employment, and it is appropriate to use such income to offset a
corresponding car payment. However, in some instances, such an allowance
may exceed the car payment. With proper documentation, income from a car
allowance which exceeds the car payment can be counted as effective
income. Likewise, any other similar type of allowance which exceeds the
specific expense involved may be added to gross income to the extent it
is documented to exceed the actual expense.

\(8\) *Commissions*. When all or a major portion of the veteran's income
is derived from commissions, it will be necessary to establish the
stability of such income if it is to be considered in the loan analysis
for the repayment of the mortgage debt and/or short-term obligations. In
order to assess the value of such income, lenders should obtain written
verification of the actual amount of commissions paid to date, the basis
for the payment of such commissions and when commissions are paid; i.e.,
monthly, quarterly, semiannually, or annually. Lenders should also
obtain signed and dated individual income tax returns, plus applicable
schedules, for the previous 2 years, or for whatever additional period
is deemed necessary to properly demonstrate a satisfactory earnings
record. The length of the veteran's employment in the type of occupation
for which commissions are paid is also an important factor in the
assessment of the stability of the income. If the veteran has been
employed for a relatively short time, the income should not normally be
considered stable unless the product or service was the same or closely
related to the product or service sold in an immediate prior position.
Generally, income from commissions is considered stable when the
applicant has been receiving such income for at least 2 years. Less than
2 years of income from commissions cannot usually be considered stable.
When an applicant has received income from commissions for less than 1
year, it will rarely be possible to demonstrate that the income is
stable for qualifying purposes; such cases would require in-depth
development.

\(9\) *Self-employment*. Generally, income from self-employment is
considered stable when the applicant has been in business for at least 2
years. Less than 2 years of income from self-employment cannot usually
be considered stable unless the applicant has had previous related
employment and/or extensive specialized training. When an applicant has
been self-employed less than 1 year, it will rarely be possible to
demonstrate that the income is stable for qualifying purposes; such
cases would require in-depth development. The following documentation is
required for all self-employed borrowers:

\(i\) A profit-and-loss statement for the prior fiscal year (12-month
accounting cycle), plus the period year to date since the end of the
last fiscal year (or for whatever shorter period records may be
available), and balance sheet based on the financial records. The
financial statement must be sufficient for a loan underwriter to
determine the necessary information for loan approval and an independent
audit (on the veteran and/or the business) by a Certified Public
Accountant will be required if necessary for such determination; and

\(ii\) Copies of signed individual income tax returns, plus all
applicable schedules for the previous 2 years, or for whatever
additional period is deemed necessary to properly demonstrate a
satisfactory earnings record, must be obtained. If the business is a
corporation or partnership, copies of signed Federal business income tax
returns for the previous two years plus all applicable schedules for the
corporation or partnership must be obtained; and

\(iii\) If the business is a corporation or partnership, a list of all
stockholders or partners showing the interest each holds in the business
will be required. Some cases may justify a written credit report on the
business as well as the applicant. When the business is of an unusual
type and it is difficult to determine the probability of its continued
operation, explanation as to the function and purpose of the business
may be needed from the applicant and/or any other qualified party with
the acknowledged expertise to express a valid opinion.

\(10\) *Recently discharged veterans*. Loan applications received from
recently discharged veterans who have little or no employment experience
other than their military occupation and from veterans seeking VA-
guaranteed loans who have retired after 20 years of active military duty
require special attention. The retirement income of the latter veterans
in many cases may not be sufficient to meet the statutory income
requirements for the loan amount sought. Many have obtained full-time
employment and have been employed in their new jobs for a very short
time.

\(i\) It is essential in determining whether veterans in these
categories qualify from the income standpoint for the amount of the loan
sought, that the facts in respect to their present employment and
retirement income be fully developed, and that each case be considered
on its individual merits.

\(ii\) In most cases the veteran's current income or current income plus
his or her retirement income is sufficient. The problem lies in
determining whether it can be properly concluded that such income level
will continue for the foreseeable future. If the veteran's employment
status is that of a trainee or an apprentice, this will, of course, be a
factor. In cases of the self-employed, the question to be resolved is
whether there are reasonable prospects that the business enterprise will
be successful and produce the required income. Unless a favorable
conclusion can be made, the income from such source should not be
considered in the loan analysis.

\(iii\) If a recently discharged veteran has no prior employment history
and the veteran's verification of employment shows he or she has not
been on the job a sufficient time in which to become established,
consideration should be given to the duties the veteran performed in the
military service. When it can be determined that the duties a veteran
performed in the service are similar or are in direct relation to the
duties of the applicant's present position, such duties may be construed
as adding weight to his or her present employment experience and the
income from the veteran's present employment thus may be considered
available for qualifying the loan, notwithstanding the fact that the
applicant has been on the present job only a short time. This same
principle may be applied to veterans recently retired from the service.
In addition, when the veteran's income from retirement, in relation to
the total of the estimated shelter expense, long-term debts and amount
available for family support, is such that only minimal income from
employment is necessary to qualify from the income standpoint, it would
be proper to resolve the doubt in favor of the veteran. It would be
erroneous, however, to give consideration to a veteran's income from
employment for a short duration in a job requiring skills for which the
applicant has had no training or experience.

\(iv\) To illustrate the provisions of paragraph (f)(10), it would be
proper to use short-term employment income in qualifying a veteran who
had experience as an airplane mechanic in the military service and the
individual's employment after discharge or retirement from the service
is in the same or allied fields; e.g., auto mechanic or machinist. This
presumes, however, that the verification of employment included a
statement that the veteran was performing the duties of the job
satisfactorily, the possibility of continued employment was favorable
and that the loan application is eligible in all other respects. An
example of nonqualifying experience is that of a veteran who was an Air
Force pilot and has been employed in insurance sales on commission for a
short time. Most cases, of course, fall somewhere between those
extremes. It is for this reason that the facts of each case must be
fully developed prior to closing the loan automatically or submitting
the case to VA for prior approval.

\(11\) *Employment of short duration*. The provisions of paragraph
(f)(7) of this section are similarly applicable to applicants whose
employment is of short duration. Such cases will entail careful
consideration of the employer's confirmation of employment, probability
of permanency, past employment record, the applicant's qualifications
for the position, and previous training, including that received in the
military service. In the event that such considerations do not enable a
determination that the income from the veteran's current position has a
reasonable likelihood of continuance, such income should not be
considered in the analysis. Applications received from persons employed
in the building trades, or in other occupations affected by climatic
conditions, should be supported by documentation evidencing the
applicant's total earnings to date and covering a period of not less
than 1 year as well as signed and dated copies of complete income tax
returns, including all schedules for the past 2 years or for whatever
additional period is deemed necessary to properly demonstrate a
satisfactory earnings record. If the applicant works out of a union,
evidence of the previous year's earnings should be obtained together
with a verification of employment from the current employer.

\(12\) *Rental income*:

\(i\) *Multi-unit subject property*. When the loan pertains to a
structure with more than a one-family dwelling unit, the prospective
rental income will not be considered unless the veteran can demonstrate
a reasonable likelihood of success as a landlord, and sufficient cash
reserves are verified to enable the veteran to carry the mortgage loan
payments (principal, interest, taxes, and insurance) without assistance
from the rental income for a period of at least 6 months. The
determination of the veteran's likelihood of success as a landlord will
be based on documentation of any prior experience in managing rental
units or other collection activities. The amount of rental income to be
used in the loan analysis will be based on 75 percent of the amount
indicated on the lease or rental agreement, unless a greater percentage
can be documented.

\(ii\) *Rental of existing home*. Proposed rental of a veteran's
existing property may be used to offset the mortgage payment on that
property, provided there is no indication that the property will be
difficult to rent. If available, a copy of the rental agreement should
be obtained. It is the responsibility of the loan underwriter to be
aware of the condition of the local rental market. For instance, in
areas where the rental market is very strong the absence of a lease
should not automatically prohibit the offset of the mortgage by the
proposed rental income.

\(iii\) *Other rental property*. If income from rental property will be
used to qualify for the new loan, the documentation required of a
self-employed applicant should be obtained together with evidence of
cash reserves equaling 3 months PITI on the rental property. As for any
self-employed earnings (see paragraph (f)(7) of this section),
depreciation claimed may be added back in as income. In the case of a
veteran who has no experience as a landlord, it is unlikely that the
income from a rental property may be used to qualify for the new loan.

\(13\) *Taxes and other deductions*. Deductions to be applied for
Federal income taxes and Social Security may be obtained from the
Employer's Tax Guide (Circular E) issued by the Internal Revenue Service
(IRS). (For veterans receiving a mortgage credit certificate (MCC), see
paragraph (f)(14) of this section.) Any State or local taxes should be
estimated or obtained from charts similar to those provided by IRS which
may be available in those states with withholding taxes. A determination
of the amount paid or withheld for retirement purposes should be made
and used when calculating deductions from gross income. In determining
whether a veteran-applicant meets the income criteria for a loan, some
consideration may be given to the potential tax benefits the veteran
will realize if the loan is approved. This can be done by using the
instructions and worksheet portion of IRS Form W-4, Employee's
Withholding Allowance Certificate, to compute the total number of
permissible withholding allowances. That number can then be used when
referring to IRS Circular E and any appropriate similar State
withholding charts to arrive at the amount of Federal and State income
tax to be deducted from gross income.

\(14\) *Mortgage credit certificates*.

\(i\) The Internal Revenue Code (26 U.S.C.) as amended by the Tax Reform
Act of 1984, allows states and other political subdivisions to trade in
all or part of their authority to issue mortgage revenue bonds for
authority to issue MCCs. Veterans who are recipients of MCCs may realize
a significant reduction in their income tax liability by receiving a
Federal tax credit for a percentage of their mortgage interest payment
on debt incurred on or after January 1, 1985.

\(ii\) Lenders must provide a copy of the MCC to VA with the home loan
application. The MCC will specify the rate of credit allowed and the
amount of certified indebtedness; i.e., the indebtedness incurred by the
veteran to acquire a principal residence or as a qualified home
improvement or rehabilitation loan.

\(iii\) For credit underwriting purposes, the amount of tax credit
allowed to a veteran under an MCC will be treated as a reduction in the
monthly Federal income tax. For example, a veteran having a \$600
monthly interest payment and an MCC providing a 30-percent tax credit
would receive a \$180 (30 percent x \$600) tax credit each month.
However, because the annual tax credit, which amounts to \$2,160 (12 x
\$180), exceeds \$2,000 and is based on a 30-percent credit rate, the
maximum tax credit the veteran can receive is limited to \$2,000 per
year (Pub. L. 98-369) or \$167 per month (\$2,000 / 12). As a
consequence of the tax credit, the interest on which a deduction can be
taken will be reduced by the amount of the tax credit to \$433 (\$600 --
\$167). This reduction should also be reflected when calculating Federal
income tax.

\(iv\) For underwriting purposes, the amount of the tax credit is
limited to the amount of the veteran's maximum tax liability. If, in the
example in paragraph (f)(14)(iii) of this section, the veteran's tax
liability for the year were only \$1,500, the monthly tax credit would
be limited to \$125 (\$1,500 / 12).

\(g\) *Credit*. The conclusion reached as to whether or not the veteran
and spouse are satisfactory credit risks must also be based on a careful
analysis of the available credit data. Regulation B (12 CFR part 202),
promulgated by the Federal Reserve Board pursuant to the Equal Credit
Opportunity Act, requires that lenders, in evaluating creditworthiness,
shall consider, on the applicant's request, the credit history, when
available, of any account reported in the name of the applicant's spouse
or former spouse which the applicant can demonstrate accurately reflects
the applicant's creditworthiness. In other than community property
states, if the spouse will not be contractually obligated on the loan,
Regulation B prohibits any request for or consideration of information
about the spouse concerning income, employment, assets or liabilities.
In community property states, information concerning a spouse may be
requested and considered in the same manner as that for the applicant.

\(1\) *Adverse data*. If the analysis develops any derogatory credit
information and, despite such facts, it is determined that the veteran
and spouse are satisfactory credit risks, the basis for the decision
must be explained. If a veteran and spouse have debts outstanding which
have not been paid timely, or which they have refused to pay, the fact
that the outstanding debts are paid after the acceptability of the
credit is questioned or in anticipation of applying for new credit does
not, of course, alter the fact that the record for paying debts has been
unsatisfactory. With respect to unpaid debts, lenders may take into
consideration a veteran's claim of bona fide or legal defenses. Such
defenses are not applicable when the debt has been reduced to judgment.
Where a collection account has been established, if it is determined
that the borrower is a satisfactory credit risk, it is not mandatory
that such an account be paid off in order for a loan to be approved.
Court-ordered judgments, however, must be paid off before a new loan is
approved.

\(2\) *Bankruptcy*. When the credit information shows that the borrower
or spouse has been discharged in bankruptcy under the "straight"
liquidation and discharge provisions of the bankruptcy law, this would
not in itself disqualify the loan. However, in such cases it is
necessary to develop complete information as to the facts and
circumstances concerning the bankruptcy. Generally speaking, when the
borrower or spouse, as the case may be, has been regularly employed (not
self-employed) and has been discharged in bankruptcy within the last one
to two years, it probably would not be possible to determine that the
borrower or spouse is a satisfactory credit risk unless both of the
following requirements are satisfied:

\(i\) The borrower or spouse has obtained credit subsequent to the
bankruptcy and has met the credit payments in a satisfactory manner over
a continued period; and

\(ii\) The bankruptcy was caused by circumstances beyond the control of
the borrower or spouse, e.g., unemployment, prolonged strikes, medical
bills not covered by insurance. Divorce is not generally viewed as
beyond the control of the borrower and/or spouse. The circumstances
alleged must be verified. If a borrower or spouse is self-employed, has
been adjudicated bankrupt, and subsequently obtains a permanent
position, a finding as to satisfactory credit risk may be made provided
there is no derogatory credit information prior to self-employment,
there is no derogatory credit information subsequent to the bankruptcy,
and the failure of the business was not due to misconduct. If a borrower
or spouse has been discharged in bankruptcy within the past 12 months,
it will not generally be possible to determine that the borrower or
spouse is a satisfactory credit risk.

\(3\) *Petition under Chapter 13 of Bankruptcy Code*. A petition under
chapter 13 of the Bankruptcy Code (11 U.S.C.) filed by the borrower or
spouse is indicative of an effort to pay their creditors. Some plans may
provide for full payment of debts while others arrange for payment of
scaled-down debts. Regular payments are made to a court-appointed
trustee over a 2- to 3-year period (or up to 5 years in some cases).
When the borrowers have made all payments in a satisfactory manner, they
may be considered as having reestablished satisfactory credit. When they
apply for a home loan before completion of the payout period, favorable
consideration may nevertheless be given if at least 12 months' worth of
payments have been made satisfactorily and the Trustee or Bankruptcy
Judge approves of the new credit.

\(4\) *Foreclosures*.

\(i\) When the credit information shows that the veteran or spouse has
had a foreclosure on a prior mortgage; e.g., a VA-guaranteed or
HUD-insured mortgage, this will not in itself disqualify the borrower
from obtaining the loan. Lenders and field station personnel should
refer to the preceding guidelines on bankruptcies for cases involving
foreclosures. As with a borrower who has been adjudicated bankrupt, it
is necessary to develop complete information as to the facts and
circumstances of the foreclosure.

\(ii\) When VA pays a claim on a VA-guaranteed loan as a result of a
foreclosure, the original veteran may be required to repay any loss to
the Government. In some instances VA may waive the veteran's debt, in
part or totally, based on the facts and circumstances of the case.
However, guaranty entitlement cannot be restored unless the Government's
loss has been repaid in full, regardless of whether or not the debt has
been waived, compromised, or discharged in bankruptcy. Therefore, a
veteran who is seeking a new VA loan after having experienced a
foreclosure on a prior VA loan will in most cases have only remaining
entitlement to apply to the new loan. The lender should assure that the
veteran has sufficient entitlement for its secondary marketing purposes.

\(5\) *Federal debts*. An applicant for a Federally-assisted loan will
not be considered a satisfactory credit risk for such loan if the
applicant is presently delinquent or in default on any debt to the
Federal Government, e.g., a Small Business Administration loan, a U.S.
Guaranteed Student loan, a debt to the Public Health Service, or where
there is a judgment lien against the applicant's property for a debt
owed to the Government. The applicant may not be approved for the loan
until the delinquent account has been brought current or satisfactory
arrangements have been made between the borrower and the Federal agency
owed, or the judgment is paid or otherwise satisfied. Of course, the
applicant must also be able to otherwise qualify for the loan from an
income and remaining credit standpoint. Refinancing under VA's interest
rate reduction refinancing provisions, however, is allowed even if the
borrower is delinquent on the VA guaranteed mortgage being refinanced.
Prior approval processing is required in such cases.

\(6\) *Absence of credit history*. The fact that recently discharged
veterans may have had no opportunity to develop a credit history will
not preclude a determination of satisfactory credit. Similarly, other
loan applicants may not have established credit histories as a result of
a preference for purchasing consumer items with cash rather than credit.
There are also cases in which individuals may be genuinely wary of
acquiring new obligations following bankruptcy, consumer credit
counseling (debt proration), or other disruptive credit occurrence. The
absence of the credit history in these cases will not generally be
viewed as an adverse factor in credit underwriting. However, before a
favorable decision is made for cases involving bankruptcies or other
derogatory credit factors, efforts should be made to develop evidence of
timely payment of non-installment debts such as rent and utilities. It
is anticipated that this special consideration in the absence of a
credit history following bankruptcy would be the rare case and generally
confined to bankruptcies that occurred over 3 years ago.

\(7\) *Consumer credit counseling plan*. If a veteran, or veteran and
spouse, have prior adverse credit and are participating in a Consumer
Credit Counseling plan, they may be determined to be a satisfactory
credit risk if they demonstrate 12 months' satisfactory payments and the
counseling agency approves the new credit. If a veteran, or veteran and
spouse, have good prior 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.

\(8\) *Re-establishment of satisfactory credit*. In circumstances not
involving bankruptcy, satisfactory credit is generally considered to be
reestablished after the veteran, or veteran and spouse, have made
satisfactory payments for 12 months after the date of the last
derogatory credit item.

\(9\) *Long-term v. short-term debts*. All known debts and obligations
including any alimony and/or child support payments of the borrower and
spouse must be documented. Significant liabilities, to be deducted from
the total income in determining ability to meet the mortgage payments
are accounts that, generally, are of a relatively long term, i.e., 10
months or over. Other accounts for terms of less than 10 months must, of
course, be considered in determining ability to meet family expenses.
Certainly, any severe impact on the family's resources for any period of
time must be considered in the loan analysis. For example, monthly
payments of \$300 on an auto loan with a remaining balance of \$1,500
would be included in those obligations to be deducted from the total
income regardless of the fact that the account can be expected to pay
out in 5 months. It is clear that the applicant will, in this case,
continue to carry the burden of those \$300 payments for the first, most
critical months of the home loan.

\(10\) *Requirements for verification*. If the credit investigation
reveals debts or obligations of a material nature which were not
divulged by the applicant, lenders must be certain to obtain
clarification as to the status of such debts from the borrower. A proper
analysis is obviously not possible unless there is total correlation
between the obligations claimed by the borrower and those revealed by a
credit report or deposit verification. Conversely, significant debts and
obligations reported by the borrower must be dated. If the credit report
fails to provide necessary information on such accounts, lenders will be
expected to obtain their own verifications of those debts directly from
the creditors. Credit reports and verifications must be no more than 120
days old (180 days for new construction) to be considered valid. For
loans closed automatically, this requirement will be considered
satisfied if the date of the credit report or verification is within 120
days (180 days for new construction) of the date the note is signed. For
prior approval loans, this requirement will be considered satisfied if
the date of the credit report or verification is within 120 days of the
date of the application is received by VA. Of major significance are the
applicant's rental history and outstanding or recently retired
mortgages, if any, particularly prior VA loans. Lenders should be sure
ratings on such accounts are obtained; a written explanation is required
when ratings are not available. A determination is necessary as to
whether alimony and/or child support payments are required. Verification
of the amount of such obligations should be obtained, although
documentation concerning an applicant's divorce should not be obtained
automatically unless it is necessary to verify the amount of any alimony
or child support liability indicated by the applicant. If in the routine
course of processing the loan application, however, direct evidence is
received (e.g., from the credit report) that an obligation to pay
alimony or child support exists (as opposed to mere evidence that the
veteran was previously divorced), the discrepancy between the loan
application and credit report can and should be fully resolved in the
same manner as any other such discrepancy would be handled. When a pay
stub or leave-and-earnings statement indicates an allotment, the lender
must investigate the nature of the allotment(s) to determine whether the
allotment is related to a debt. Debts assigned to an ex-spouse by a
divorce decree will not generally be charged against a veteran-borrower.

\(11\) *Job-related expenses*. Known job-related expenses should be
documented. This will include costs for any dependent care, significant
commuting costs, etc. When a family's circumstances are such that
dependent care arrangements would probably be necessary, it is important
to determine the cost of such services in order to arrive at an accurate
total of deductions.

\(12\) *Credit reports*. Credit reports obtained by lenders on
VA-guaranteed loan applications must be either a three-file Merged
Credit Report (MCR) or a Residential Mortgage Credit Report (RMCR). If
used, the RMCR must meet the standards formulated jointly by the
Department of Veterans Affairs, Federal National Mortgage Association,
Federal Home Loan Mortgage Corporation, Federal Housing Administration,
Farmers Home Administration, credit repositories, repository affiliated
consumer reporting agencies and independent consumer reporting agencies.
All credit reports obtained by the lender must be submitted to VA.

\(h\) *Borrower's personal and financial status*. The number and ages of
dependents have an important bearing on whether income after deduction
of fixed charges is sufficient to support the family. Type and duration
of employment of both the borrower and spouse are important as an
indication of stability of their employment. The amount of liquid assets
owned by the borrower or spouse, or both, is an important factor in
determining that they have sufficient funds to close the loan, as well
as being significant in analyzing the overall qualifications for the
loan. (It is imperative that adequate cash assets from the veteran's own
resources are verified to allow the payment (see §36.4336(a)(3)) of any
difference between the sales price of the property and the loan amount,
in addition to that necessary to cover closing costs, if the sales price
exceeds the reasonable value established by VA.) Verifications must be
no more than 120 days old (180 days for new construction) to be
considered valid. For loans closed on the automatic basis, this
requirement will be considered satisfied if the date of the deposit
verification is within 120 days (180 days for new construction) of the
date of the veteran's application to the lender. For prior approval
loans, this requirement will be considered satisfied if the verification
of employment is dated within 120 days of the date the application is
received by VA. Current monthly rental or other housing expense is an
important consideration when compared to that to be undertaken in
connection with the contemplated housing purchase.

\(i\) *Estimated monthly shelter expenses*. It is important that monthly
expenses such as taxes, insurance, assessments and maintenance and
utilities be estimated accurately based on property location and type of
house; e.g., old or new, large or small, rather than using or applying a
"rule of thumb" to all properties alike. Maintenance and utility amounts
for various types of property should be realistically estimated. Local
utility companies should be consulted for current rates. The age and
type of construction of a house may well affect these expenses. In the
case of condominiums or houses in a planned unit development (PUD), the
monthly amount of the maintenance assessment payable to a homeowners
association should be added. If the amount currently assessed is less
than the maximum provided in the covenants or master deed, and it
appears likely that the amount will be insufficient for operation of the
condominium or PUD, the amount used will be the maximum the veteran
could be charged. If it is expected that real estate taxes will be
raised, or if any special assessments are expected, the increased or
additional amounts should be used. In special flood hazard areas,
include the premium for any required flood insurance.

\(j\) *Lender responsibility*.

\(1\) Lenders are fully responsible for developing all credit
information; i.e., for obtaining verifications of employment and
deposit, credit reports, and for the accuracy of the information
contained in the loan application.

\(2\) Verifications of employment and deposits, and requests for credit
reports and/or credit information must be initiated and received by the
lender.

\(3\) In cases where the real estate broker/agent or any other party
requests any of this information, the report(s) must be returned
directly to the lender. This fact must be disclosed by appropriately
completing the required certification on the loan application or report
and the parties must be identified as agents of the lender.

\(4\) Where the lender relies on other parties to secure any of the
credit or employment information or otherwise accepts such information
obtained by any other party, such parties shall be construed for
purposes of the submission of the loan documents to VA to be authorized
agents of the lender, regardless of the actual relationship between such
parties and the lender, even if disclosure is not provided to VA under
paragraph (j)(3) of this section. Any negligent or willful
misrepresentation by such parties shall be imputed to the lender as if
the lender had processed those documents and the lender shall remain
responsible for the quality and accuracy of the information provided to
VA.

\(5\) All credit reports secured by the lender or other parties as
identified in paragraphs (j)(3) and (j)(4) of this section shall be
provided to VA. If updated credit reports reflect materially different
information than that in other reports, such discrepancies must be
explained by the lender and the ultimate decision as to the effects of
the discrepancy upon the loan application fully addressed by the
underwriter.

\(k\) *Lender certification*. Lenders originating loans are responsible
for determining and certifying to VA on the appropriate application or
closing form that the loan meets all statutory and regulatory
requirements. Lenders will affirmatively certify that loans were made in
full compliance with the law and loan guaranty regulations as prescribed
in this section.

\(1\) *Definitions*. The definitions contained in part 42 of this title
and the following definitions are applicable in this section.

\(i\) *Another appropriate amount*. In determining the appropriate
amount of a lender's civil penalty in cases where the Secretary has not
sustained a loss or where two times the amount of the Secretary's loss
on the loan involved does not exceed \$10,000, the Secretary shall
consider:

> \(A\) The materiality and importance of the false certification to the
> determination to issue the guaranty or to approve the assumption;
>
> \(B\) The frequency and past pattern of such false certifications by
> the lender; and
>
> \(C\) Any exculpatory or mitigating circumstances.
>
> \(ii\) *Complaint* includes the assessment of liability served
> pursuant to this section.
>
> \(iii\) *Defendant* means a lender named in the complaint.
>
> \(iv\) *Lender* includes the holder approving loan assumptions
> pursuant to 38 U.S.C. 3714.

\(2\) *Procedures for certification*.

\(i\) As a condition to VA issuance of a loan guaranty on all loans
closed on or after October 27, 1994, and as a prerequisite to an
effective loan assumption on all loans assumed pursuant to 38 U.S.C.
3714 on or after November 17, 1997, the following certification shall
accompany each loan closing or assumption package:

> The undersigned lender certifies that the (loan) (assumption)
> 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 or
> generated in connection with the processing of this borrower's (loan)
> (assumption) application have been provided to VA; that, to the best
> of the undersigned lender's knowledge and belief the (loan)
> (assumption) 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) (assumption) is true,
> complete and accurate to the best of the undersigned lender's
> knowledge and belief.

\(ii\) The certification shall be executed by an officer of the lender
authorized to execute documents and act on behalf of the lender.

\(3\) Any lender who knowingly and willfully makes a false certification
required pursuant to §36.4337(k)(2) shall be liable to the United States
Government for a civil penalty equal to two times the amount of the
Secretary's loss on the loan involved or to another appropriate amount,
not to exceed \$10,000, whichever is greater.

\(l\) *Assessment of liability*.

\(1\) Upon an assessment confirmed by the Under Secretary for Benefits,
in consultation with the Investigating Official, that a certification,
as required in this section, is false, a report of findings of the Under
Secretary for Benefits shall be submitted to the Reviewing Official
setting forth:

> \(i\) The evidence that supports the allegations of a false
> certification and of liability;
>
> \(ii\) A description of the claims or statements upon which the
> allegations of liability are based;
>
> \(iii\) The amount of the VA demand to be made; and
>
> \(iv\) Any exculpatory or mitigating circumstances that may relate to
> the certification.

\(2\) The Reviewing Official shall review all of the information
provided and will either inform the Under Secretary for Benefits and the
Investigating Official that there is not adequate evidence, that the
lender is liable, or serve a complaint on the lender stating:

> \(i\) The allegations of a false certification and of liability;
>
> \(ii\) The amount being assessed by the Secretary and the basis for
> the amount assessed;
>
> \(iii\) Instructions on how to satisfy the assessment and how to file
> an answer to request a hearing, including a specific statement of the
> lender's right to request a hearing by filing an answer and to be
> represented by counsel; and
>
> \(iv\) That failure to file an answer within 30 days of the complaint
> will result in the imposition of the assessment without right to
> appeal the assessment to the Secretary.

\(m\) *Hearing procedures*. A lender hearing on an assessment
established pursuant to this section shall be governed by the procedures
recited at 38 CFR 42.8 through 42.47.

\(n\) *Additional remedies*. Any assessment under this section may be in
addition to other remedies available to VA, such as debarment and
suspension pursuant to 38 U.S.C. 3704 and 2 CFR parts 180 and 801 or
loss of automatic processing authority pursuant to 38 U.S.C. 3702, or
other actions by the Government under any other law including but not
limited to title 18 U.S.C. and 31 U.S.C. 3732.

(The information collection requirements in this section have been
approved by the Office of Management and Budget under control numbers
2900-0521)

(Authority: 38 U.S.C. 3703, 3710)

(Information collection requirements contained in 36.4337 were approved
by the Office of Management and Budget under control number 2900-0521)

\[56 FR 9855, Mar. 8, 1991, as amended at 59 FR 49200, Sept. 27, 1994;
61 FR 56449, Nov. 1, 1996; 62 FR 52505, Oct. 8, 1997; 62 FR 53965, Oct.
17, 1997; 62 FR 63454, Dec. 1, 1997; 64 FR 19910, Apr. 23, 1999; 72 FR
30242, May 31, 2007\]

**Supplement *Highlights* references**: 10(2), 16(1), 18(1, 2), 19(2),
21(1), 31(1).

Reserved