Understanding VA Home Loan Income Requirements

How much VA home loan can you afford?

Do you qualify for a VA loan to buy a home? VA home loans offer unique benefits to military veterans, such as no down payment and lower interest rates. Understand the income requirements before you apply; this article will explain the eligibility criteria.

Determining Income Eligibility for VA Loans

Calculating gross monthly income can be problematic. Some applicants work 40 hours a week, and other employees 37.5 hours; some receive bonus income, and others earn overtime pay. 

The VA underwriter must determine if the applicant's income is stable and reliable, anticipated to continue during the foreseeable future, and
sufficient in amount to carry the monthly mortgage payment.

You might be surprised to learn that the VA income requirements are very flexible, and the VA manual speaks about general requirements. There are no hard and fast loan requirements because the VA does not lend directly to the borrower, which is left up to VA-approved lenders. 

VA lenders must verify two years of employment. If the applicant (including a spouse) has less than two years of employment, the lender must:

  1. verify prior work plus present employment covering a total of 2 years,
  2. explain why two years of employment could not be verified,
  3. compare any different types of employment verifications obtained (such as, Verification of Employment (VOE), pay stubs, and tax returns for consistency), and
  4. clarify any substantial differences in the data that would affect the applicant's qualification.

Documentation of Income

All VA lenders will request documentation of an applicant's earnings, and lenders usually ask for the most recent pay stub to cover the previous 30 days. The lender will also request the W-2s for the past two years.

The lender may ask the employer to complete Form VA Form 26-8497, Request for Verification of Employment. The form asks the employer to acknowledge the applicant's income and whether the continuance of employment is likely.

Building Trades or Other Seasonal or Climate-Dependent Employment

If the applicant is employed in the building trades or seasonal work, the lender will request:

  • documentation evidencing the applicant's total year-to-date,
    earnings 
  • signed and dated individual income tax returns for the previous two years, and
  • if the applicant works out of a union, evidence of the union's history with the applicant
  • According to the VA underwriting manual:
    Income analysis is an inexact science. It requires the lender to underwrite each loan on a case-by-case basis, using:
  • common sense
  • judgment, and
  • flexibility when warranted.
  • The underwriter must analyze the probability of continued employment (that is, whether income is stable and reliable) by examining the following:
  • applicant's training, education, and qualifications for their position,
  • applicant's past employment record,
  • type of employment, and
  • employer's confirmation of continued work, if provided.

In the applicant's current position, two years of employment is a positive
indicator of continued work. It is not a required minimum and only sometimes sufficient to conclude the probability of continued employment.

Less Than 12 Months of Employment

Veteran with his hamilyEmployment of less than 24 months may be acceptable if the applicant was enrolled in school or a training program and the employer acknowledges the applicant's likelihood of continued employment.

The underwriter must carefully consider the employer's evaluation of the probability of continued employment for less than 12 months and assess whether the applicant's training and education relate directly to the duties of their current position (generally applies to skilled jobs such as a nurse, medical technician, lawyer, paralegal, and computer systems analyst). 

Suppose the probability of continued employment is high. In that case, lenders may give favorable consideration to including the income in the total effective income, explaining why the income of fewer than 12 months was used.

Suppose the probability of continued employment is good but not as well supported. In that case, lenders may still consider the income if the applicant has been employed for at least six months to offset debts of 10 to 24 months duration partially.

Recent and Frequent Changes in Employment

Short-term employment in the current position and frequent job changes in the recent past require special consideration by the underwriter when determining income stability. The underwriter must examine the causes of the employment shifts.

Underwriters will favorably view any promotion-related job changes. However, if there is no obvious improvement from one job to the next, underwriters will scrutinize the applicant's income.


Income from Overtime Work, Part-time Jobs, Second Jobs, and Bonuses

The Department of Veterans Affairs has limited flexibility concerning additional income from the sources above. The VA states that a source of income cannot be considered stable and reliable unless it has been in place for two years (and verified).

In order for a source of income to be considered reliable, it must meet specific criteria. 

Firstly, the income must be regular and predictable to ensure that the applicant will have a steady stream of funds. 

Secondly, there must be a reasonable expectation that the income will continue in the foreseeable future based on its compatibility with the applicant's primary job and how long they have been employed under such an arrangement. 

Finally, other work conditions should also be considered when assessing the reliability of an applicant's source of income.

Commission Income

The VA says that commission income can only be considered stable after it has been earned for at least two years.

Rarely can a commission income of less than two years be considered stable unless the applicant has previous experience in the field and extensive specialized training. To be considered for a loan, the applicant must demonstrate the ability to acquire and maintain consistent commission income over a period of time.

The lender will ask the employer to verify the employment with the verification form or other written verification that contains details about the:

  1. amount of commissions paid year-to-date, 
  2. the basis for payment (salary plus commission, 
    straight commission, or 
  3. draws against commission), and 
  4. when commissions are paid (monthly, quarterly, semiannually, or annually). 

Additionally, the employee will need to provide individual income tax returns, all applicable schedules, and additional periods to prove a satisfactory earnings record. All documents must be signed and dated.

Income From Self-Employment

Applicants must provide the lender with financial statements prepared in a generally recognized format, including a year-to-date profit and loss statement and a current balance sheet. 

The lender may require accountant-prepared financial statements or financial statements audited by a Certified Public Accountant. Applicants must also provide the lender with 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, applicants must provide a profit and loss statement for that year. Corporations or partnerships must provide copies of their signed federal business income tax returns from the last two years and all relevant schedules, a list of all stockholders or partners, and the amount each owns in the business. 

The underwriter must analyze applicants who have been in business for less than two years to stabilize their self-employment income and conduct a comprehensive analysis to determine if the company can generate enough income to sustain the applicant's future needs. 

They must also analyze the reasons behind any steady or significant decline in earnings, including depreciation claimed as a deduction on the tax returns and financial statements of the business in effective income, and may obtain a written credit report on the company.

Conclusion

Analyzing an applicant's monthly income is one of the most challenging tasks for an underwriter. They must carefully assess the applicant's income sources and stability, as well as their ability to continue to provide reliable and sufficient income in the foreseeable future. With the VA's flexible income requirements, underwriters can give favorable consideration to applicants and reach a conclusion that is appropriate for the situation.

SOURCE:

(2022). Chapter 4. Credit Underwriting. VA Underwriting Manual.

Recommended Reading

  1. Do VA Loan Require PMI Insurance: What It Is and What It Does
  2. How does the Earnest Money Deposit Work for a VA Loan
  3. VA Amendatory Escape Clause : What It is and What It Does