Announcement 19-0058: CMS VA Underwriting Guideline Updates

Overview

Carrington Mortgage Services, LLC (CMS) is pleased to announce the following recent guideline enhancements for the VA loan product.

Please note: Substantial changes have been made to the guidelines to align with recent VA Guidance and are summarized below. Refer to the CMS VA Underwriting Guidelines for detailed information.

VA Guidelines (continued)

Topic

Updated Requirements

Income (continued)

·      For self-employed borrowers, YTD financial statements (P&L and Balance Sheet) are required after one-half of the tax year has passed to verify current income and stability of the income

·      Business or roll over losses must be considered from all tax returns

·      What is reported to the IRS on a joint return must be used when applying for a federally guaranteed loan. On a joint tax return, the loss must be deducted from the borrower’s income in both community and non-community property states.

·      If an Officer has an ETS date listed as 888888 or 000000 on his or her Leave and Earnings Statement (LES), the above documentation is not required unless there is evidence that the Officer has resigned his or her commission.

·      Cash proceeds from a VA refinance cannot be counted as the required PITI on a rental property. The reserve funds must be in the borrower’s account before the new VA loan closes.

·      For rental property income - Each property(ies) must have a 2-year rental history itemized on the borrower’s tax return.

·      Boarder income is acceptable with 2 years tax returns reflecting boarder income and rental cannot exceed 25% of the total floor area. Must justify likelihood of continued success based on local market on the 6383. PITI reserves are not required.

·      The lender may include workers’ compensation income that will continue for at least 3 years from the anticipated closing date if the borrower chooses to reveal it.

·      A borrower in receipt of VA Pension or Disability benefits with Aid and Attendance should be discussed with the VA Pension Service, VA Compensation Service, or the VA Hospital where the property is located, to determine if the income is likely to continue for the foreseeable future.

·      An active-duty servicemember’s LES may have a different state tax deduction than the state where the active-duty servicemember will be purchasing a residence or refinancing. Select the state listed on the LES for the state taxes to be considered in state tax deductions.

·      Use a figure of 125 percent of the borrower’s non-taxable income when “grossing up.”

VA Guidelines (continued)

Topic

Updated Requirements

Assets

·      All-new gift section; however, it generally aligns with existing CMS policy. Requires a gift letter and documentation for the transfer / receipt of gift funds. Does not require donor’s source of funds.

·      For net sales proceeds: “Evidence the sale has been completed should be included in the closing package to verify proceeds from the sale” (new section)

·      REMOVED: No verification of veteran’s source of funds is required if closing costs plus the difference between the sales price of the property and the base loan amount is < 4 percent of the lesser of the following: sales price, or reasonable value established by an NOV.

Debts

·      For non-borrowing spouse (NBS) debts such as judgments and unpaid collection accounts, lenders should consider the Veteran’s capacity to address the debt(s). Develop the facts surrounding any unsatisfied judgments on the spouse’s credit report, such as where the judgment was filed and whether the parties were married to one another at the time, and secure a competent legal opinion whether the judgment may become a lien against the property.

·      Do not request documentation of a borrower’s divorce unless it is necessary to verify the amount of any alimony or child support liability indicated by the borrower. If, however, in the routine course of processing the loan, the lender encounters direct evidence (such as, in the credit report) that a child support or alimony obligation exists, they should make any inquiries necessary to resolve discrepancies and obtain the appropriate verification.

·      If the student loan payment(s) reported on the credit report is less than the threshold payment calculation 5% / 12, in order to count the lower payment, the loan file must contain a statement from the student loan servicer that reflects the actual loan terms and payment information for each student loan(s). The statement(s) must be dated within 60 days of VA loan closing, and may be an electronic copy from the student loan servicer’s website or a printed statement provided by the student loan servicer.

·      For open 30-day charge accounts, determine if the borrower(s) pays the balance in full each month, and has verified funds to cover the account balance in addition to any funds required for closing costs. If there are sufficient funds, the payment does not need to be included in Section D of the VA Form 26-6393, Loan Analysis, but the obligation should continue to be listed. If there are not sufficient funds, a minimum payment of 5 percent of the balance should be considered included in Section D of the VA Form 26-6393, Loan Analysis.

VA Guidelines (continued)

Topic

Updated Requirements

Debts (continued)

·      VA made various language changes to the disability questionnaire.

·      VA added more specific guidance regarding debts revealed on the 8937

·      Each agency has their timeliness requirements before removing a non “A” CAVIRS finding. This does not preclude the Veteran or borrower from receiving a VA loan if credit standards are met for VA loans.

Example: A borrower suffered a loss on a FHA loan home loan 2 years ago. While HUD has not removed the CAIVRS finding as the 3-year waiting period has not passed for FHA, the lender is eligible to continue processing a VA loan without an “A” CAIVRS finding due to the borrower(s) meeting VA credit guidelines for foreclosures and documented in the loan file.

·      The borrower’s most recent 24-month rental history and any outstanding, assumed, or recently retired mortgages must be verified and rated.

·      While VA does not require that collection accounts be paid-off prior to closing if the borrower’s overall credit is acceptable, an underwriter must address the existence of the collection account(s) with an explanation on VA Form 26-6393, Loan Analysis, for excluding the negative credit history they represent.

·      If the collection account is listed on the credit report with a minimum payment, then the debt should be recognized at the minimum payment amount.

·      Repayment plans for judgments: A history of timely payments would be generally considered as making 12 payments to reestablish credit. However, in certain cases when a judgment has only been in place for a few months, an underwriter could justify on VA Form 26-6393, Loan Analysis, a shorter repayment history if the documentation indicates the borrower immediately addressed the judgment after it was filed and began a repayment plan.

·      For unpaid or debts that have not been paid timely, pay-off of these debts after the acceptability of a borrower's credit is questioned does not alter the unsatisfactory record of payment. A period of making timely payments on subsequent obligations for at least 12 months, then satisfactory credit is considered re-established

VA Guidelines (continued)

Topic

Updated Requirements

Debts (continued)

·      If a foreclosure, deed in lieu, or short sale process is in conjunction with a bankruptcy, use the latest oldest date of either the discharge of the bankruptcy or transfer of title for the home to establish the beginning date of re-established credit. If there is a significant delay in the transfer of title, the lender should contact the RLC of jurisdiction for guidance.

·      For a deed in lieu or short sale, develop complete information on the facts and circumstances in which the borrowers) voluntarily surrendered the property. If the borrower’s payment history on the property was not affected before the short sale or deed in lieu and was voluntarily communicating with the servicer or holder, then a waiting period from the date transfer of the property may not be necessary.