Designed to offer long-term financing to American veterans, VA mortgage loans are issued by federally qualified lenders and are guaranteed by the U.S. Veterans Administration. The VA determines eligibility and issues a certificate to qualifying applicants to submit to their mortgage lender of choice. It is generally easier to qualify for a VA loan than conventional loans.

Here's how it works:

• 100% financing without private mortgage insurance or 20% second mortgage.
• A VA funding fee of 0 to 3.3% (this fee may be financed) of the loan amount is paid to the VA.
• When purchasing a home, veterans may borrow up to 100% of the sales price or reasonable value of the home, whichever is less.
• When refinancing a home, veterans may borrow up to 90% of reasonable value in order to refinance where state law allows.

Apply for a VA Loan with a VA Qualified Lender.

SECTION 1: CODING
PROGRAM CODES: 30- and 25-Year Fixed term: 4500-00
15-Year Fixed Rate Term: 4600-00
3/1 ARM: 4857-00
5/1 ARM: 4858-00
Temporary Buydown codes:
Buydown Term Lender Paid Seller Paid
2/1 Buydown 4519L-00 4519S-00
1/0 Buydown 4520L-00 4520S-00
Second Lien Program
Codes:
Not applicable
SECTION 2: LTV/CLTV/LOAN AMOUNTS BY DOC TYPE
FULL
DOCUMENTATION:
Purchase: LTV CLTV/HCLTV OCC Property
100% N/A Owner 1-4 Units*
* See property section below for restrictions on 2-4 units. Condos in Florida not permitted.
Note: Loan amounts >$417,000 are limited to one unit properties. See maximum loan
amount section below for additional Jumbo loan (>$417,000-$650,000) requirements.
See the Maximum Loan Amount section below for instructions on calculating the maximum
loan amount.
Streamline Refinance
(IRRRL)
LTV CLTV/HCLTV OCC Property
100% ** Owner 1-4 units
Condos in Florida not permitted.
Existing loan must be a VA loan.
**See the Maximum Loan Amount section below for instructions on calculating the
maximum loan amount and LTV/CLTV.
Note: The maximum loan amount on IRRRL is $417,000 including VA funding fee. A
conventional appraisal (interior/exterior, AIR compliant) is required. The value must be
supported and be equal to or greater than the total loan amount (base loan amount plus VA
funding fee).
Cash-out Refinance: LTV CLTV/HCLTV OCC Property
90%** 90% Owner 1-4 units*
* See property section below for restrictions on 2-4 units. Condos in Florida not permitted.
**See the Maximum Loan Amount section below for instructions on calculating the
maximum loan amount and LTV/CLTV.
SECTION 3: PROGRAM PARAMETERS
MINIMUM LOAN AMT: $40,000
MAXIMUM LOAN
AMOUNT:
NOTE: The Department of Veteran Affairs has released the new loan limits for High Cost
Counties for 2011. These limits apply to all loans closed January 1, 2011 through
December 31, 2011.
These new loan limits are posted on the VA Website.
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MAXIMUM LOAN
AMOUNT: (cont’d)
http://www.benefits.va.gov/homeloans/docs/2011_county_loan_limits.pdf
Maximum Loan amount for a regular purchase transaction is $417,000 (including VA funding
fee)
VA Jumbo maximum loan amount: >$417,000 to $650,000 (including the VA funding fee)
• The amount of available VA Entitlement must be 25% of the lesser of the sales price or
appraised value. If the If the Veteran does not have sufficient eligibility to cover 25% of the
lesser of the sales price or the appraiser value, or if the total loan amount is higher than the
county limit for a one unit dwelling, a down payment would be required to meet the 25%.
• The maximum guaranty that VA will provide is 25% of the maximum county limits. The
maximum loan amount for a 100% LTV/CLTV purchase transaction with full entitlement,
including the VA Funding Fee, is $650,000.
• Only one unit properties are permitted.
• Only the 30 year fixed rate term is permitted.
• ARMs are not permitted.
• Buydowns are not permitted.
• Subordinate financing is not permitted.
• 660 credit score is required for ALL borrowers
• See rate sheet for any pricing adjustments.
Streamline Refinance (IRRRL):
• Maximum Loan Amount $417,000 including VA funding fee.
• (VA to VA) the maximum loan amount is calculated by completing the VA Interest Rate
Reduction Refinancing Worksheet. (VA Form 26-8923)
Maximum loan amount for cash out refinance:
• Appraised value x 90% (maximum LTV & CLTV)
• The maximum loan amount for cash out refinance is $417,000 including funding fee
• UW must refer to the VA Handbook in any case where the Veteran does not have full
entitlement to ensure a 25% guaranty
• Note: payoff of any non-VA loan is considered a cash out refinance.
ALLOWABLE TERMS: 15, 25 & 30 year fixed rate term
Only the 30 year term is permitted for Jumbo loan amounts. (>$417,000 to $650,000)
3/1 & 5/1 ARMs
CASH PROCEEDS: No restrictions
SPECIAL PROGRAM
REQUIREMENTS:
VA Loan Guaranty:
• Veterans are required to have sufficient entitlement on a Certificate of Eligibility to cover 25% of
loan amount.
• The maximum guaranty that VA will provide is 25% of the maximum county limits. The maximum
loan amount for a 100% LTV/CLTV purchase transaction with full entitlement, including the VA
Funding Fee, is $650,000.
• A Certificate of Eligibility can be requested at Veterans Information Portal website
https://vip.vba.va.gov/portal/VBAH/Home - (requires registration, user name + password):
Select “ WebLGY “ then select “ Eligibility” and input the veteran’s information from VA form 26-
1880.
• When possible the system will issue a Certificate of Eligibility immediately; otherwise, an
application for the Certificate of Eligibility must be completed with information from VA form
1880. Both the completed, signed form 26-1880 and a copy of the DD214 must be uploaded to
the VA system with the application. The certificate will be emailed to the requestor in 2-3 days.
• If the form 26-1880 and DD214 are not uploaded, the processing time may be delayed
approximately 10 days.
• Veterans receiving VA pension for non-service-connected disability will require prior approval
from VA.
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SPECIAL PROGRAM
REQUIREMENTS:
(cont’d)
Funding Fee:
• A VA Funding Fee is required on all transactions (purchases and refinances) per the charts
below.
• Note: The down payment factor is based on the actual down payment that the Veteran
pays regardless of LTV (in cases where the appraised value may be lower than the sales
price).
• Reminder: The VA funding fee may either be fully financed or fully paid in cash. It may not be
partially funded or partially paid in cash.
The following persons are exempt from paying the funding fee:
• Veterans receiving VA compensation for service-connected disabilities.
• Veterans who would be entitled to receive compensation for service-connected disabilities if they
did not receive retirement pay or active service pay.
• Veterans who are rated by VA as eligible to receive compensation as a result of pre-discharge
disability examination and rating.
• Surviving spouses of veterans who died in service or from service-connected disabilities
(whether or not such surviving spouses are veterans with their own entitlement and whether or
not they are using their own entitlement on the loan).
• A surviving spouse who has not remarried MAY be eligible for an exemption.
• VA must confirm veteran’s exemption from paying the funding fee on VA Form 26-8937. (VA
Benefit Related Indebtedness form)
• Veterans receiving VA pension for non-service-connected disability will require prior approval
from VA.
Purchase:
Type of Veteran Down Payment % for First Time
Use
% for Subsequent
Use
Regular Military None
5% or more (up to
10%)
10% or more
2.15%
1.50%
1.25%
3.30% *
1.50%
1.25%
Reserves/
National Guard
None
5% or more (up to
10%)
10% or more
2.40%
1.75%
1.50%
3.30% *
1.75%
1.50%
Cash-out Refinance:
Type of Veteran % for First Time Use % for Subsequent Use
Regular Military 2.15% 3.30% *
Reserves/national Guard 2.40% 3.30% *
* The higher subsequent use fee does not apply to these types of loans if the veteran’s only prior
use of entitlement was for a manufactured home loan.
IRRRL: (Interest Rate Reduction Refinancing Loans): 0.50% for either type of Veteran.
Type of Loan Percentage for Either Type of Veteran
Interest Rate Reduction Refinancing Loans .50%
VA FIXED RATE
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ARM ADJUSTMENTS: The index is the (CMT), the weekly average yield on United States Treasury Securities adjusted to
a constant maturity of one year.
ARM loans adjust as follows:
Fixed Term Adjustment Life Cap
3 Year 36 months 1%/annual 5%
5 Year 60 months 1%/annual 5%
• The loans are not convertible.
• The loan may be assumable subject to lender approval.
On the 3 year and 5 year ARMs borrowers are qualified at the start rate (note rate) regardless of
the LTV
Maximum loan amount $417,000 on ARMs (including funding fee)
INTEREST ONLY
OPTION:
Not applicable
TEMPORARY
BUYDOWNS:
• NOTE: BUYDOWNS ARE CURRENTLY SUSPENDED UNTIL FURTHER NOTICE
• Lender & seller paid buy downs are permitted on the 30 year fixed rate term.
• 2/1 & 1/0 buy downs are permitted
• Buydowns are not permitted on ARM programs.
• Purchase transactions only.
• Increases can not exceed 1% per year
• Signed buy down agreement is required
• Borrowers are qualified based on note rate.
• As an exception a borrower may be qualified at the start rate if an increase in income used to
qualify can be documented with a confirmed future promotion or a wage percentage increase is
guaranteed by labor contract and if the documented increase is sufficient to cover the payment
increases.
• Buydowns are not permitted for loan amounts >$417,000
PREPAYMENT
PENALTY:
Not applicable.
SECTION 4: BORROWER ELIGIBILITY
FIRST TIME
HOMEBUYER:
• Veterans do not have to be a first time homebuyer, but first time homebuyers are permitted as
long as the VA loan parameters are met.
NON-OCCUPANT COBORROWER:
Not permitted.
PERMANENT RESIDENT
ALIEN:
• Allowed under the same terms as US citizens.
• Permanent resident aliens must provide proof of their residency (i.e. green card).
NON-PERMANENT
RESIDENT ALIEN:
Not permitted
FOREIGN NATIONAL: Not permitted
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NON-ARMS LENGTH
TRANSACTIONS:
• A non-arms length transaction is defined as a direct relationship between any of the parties to
the transaction including, buyer, seller, employer, lender, originator, appraiser, etc.
• Non-arms length transactions may be acceptable provided there is adequate verification the
borrower is making the required minimum down payment from their own funds, there is an
executed sales contract, the appraisal supports the value and the appraiser comments on
whether the market value is affected by the relationship of the parties.
• A non arms length transaction may not be used to bail out a family member or any other owner
with an established relationship to the borrower from a delinquent mortgage.
• The title commitment may not show any evidence of foreclosure proceedings or NOD.
• If the seller is a corporation, partnership or any other business entity, there must be proof that
the borrower is not an owner of the business entity selling the subject property.
NUMBER OF OTHER
PROPERTIES:
• VA will not guarantee more than one property per borrower unless the Veteran has
sufficient remaining entitlement and/or equity to ensure a 25% guarantee, otherwise a VA
exception is required.
• An exception may be made by VA if the veteran has obtained VA one time exemption to allow
the Veteran’s eligibility to be restored without disposing of the property. The Veteran must apply
directly to VA for this exemption.
• See “Qualifying” section below for primary residence conversions to investment or 2nd
home, or pending sales of departure property.
• If the transaction is the purchase of a principal residence, but a previous mortgage transaction
within the past 12 months was also the purchase of a principal residence, the borrower must
provide reasonable documentation to justify the new transaction (e.g. a letter of explanation, or
other acceptable documentation). Any address discrepancies or "red flags" must be fully
addressed.
• A borrower purchasing a new primary that is of lesser size or value should be carefully
analyzed by the underwriter
• Relocation and/or extenuating circumstances must be documented and verified
• Non occupant coborrower/co-signer situations (where the previous owner occ purchase was
a cosigned loan) must also be verified and fully documented.
• Stearns has the right to refuse the occupancy type if it cannot be adequately established.
SECTION 5: CREDIT CRITERIA
UNDERWRITING: • DU/LP approve/eligible or accept is required on this program.
• Refer is allowed under certain guidelines only, see credit requirement below.
• Manual underwriting is not permitted (except where noted below)
• DTI maximum 50% regardless of AUS recommendation.
• Veterans receiving VA pension for non-service-connected disability will require prior approval
from VA.
CREDIT SCORES: • A 3 bureau merged in-file report or full credit report (RMCR) must be obtained that contains at
least 2, but preferably 3 credit scores for each borrower.
• A “representative score” (lower of 2, middle of 3) will be chosen for each borrower on the loan.
• A minimum 620 credit score is required for all borrowers, regardless of AUS approval, for
purchase transactions.
• A minimum 640 credit score is required for all borrowers, regardless of AUS approval, for cash
out refinance transactions.
• A minimum 640 credit score is required for each and every borrower on all IRRRL
transactions.
• A minimum 660 credit score is required for all borrowers with loan amounts > $417,000.
• A co-borrower with no score is not permitted.
• Borrowers with no credit score or who have too few credit trade lines to obtain a credit score are
not permitted. Non-traditional credit is not accepted.
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CREDIT
REQUIREMENTS:
• If the loan is underwritten by DU or LP and the result is Approve/Eligible or Accept, the findings
report may be followed for credit requirements and inquiry explanations are not required, except
where noted below.
• If required by AUS, the borrowers’ housing history must be documented for the last 12 months
on a credit report, with a verification of rent directly from the landlord, with 12 months canceled
checks or a verification of mortgage from the loan servicer.
• The borrowers’ mortgage history must show 0X30 day lates in the last 12 months for all
transactions regardless of AUS.
• AUS Approve/Eligible or Accept recommendations where the credit report or AUS indicates
prior bankruptcy, foreclosure or short sale are permitted as long as VA guidelines are met,
however the underwriter should verify the data integrity in these instances.
• Refer responses permitted with the following criteria only:
• Chapter 7 Bankruptcy: Must be discharged 3 years
• Chapter 13 Bankruptcy: Must be discharged 1 year
• Foreclosure: Must be discharged for 5 years
• Maximum DTI 45% (DTI > 41% must meet VA guidelines outlined in the Ratios
section below)
• Temporary Buydowns not permitted
• Maximum loan amount $417,000. High Balance not permitted.
• Short payoffs or settlements on a mortgage lien are considered the same as a foreclosure so
must be seasoned at least 3 years with an AUS Approval and 5 years with an AUS Refer or a
manual downgrade. Please note that AUS may not recognize the short sale so this should be
analyzed by the underwriter.
• Borrower may currently be in active consumer credit counseling if:
• AUS Approval required no Refer or manual downgrade permitted.
• The borrower has participated in the plan for 1 year with no lates
• An explanation letter from the borrower regarding the counseling is required
• If the transaction is a purchase, payment shock > 25% will require a 2nd signature from
corporate support.
• Major derogatory credit (i.e. judgments, collections, etc.) requires a written explanation.
• Inquiries: A detailed explanation letter that specifically addresses both the purpose and
outcome of each inquiry is required. If additional credit was obtained, a verification of that debt
must be obtained and the AUS findings must be updated to include the debt.
• Court ordered judgments must be paid off before a borrower will be eligible for a VA loan unless
the borrower has agreed to a payment plan with the creditor and has been making timely
payments per the payment plan.
• If the borrower is currently delinquent on any federal debt (i.e. VA loan, title 1 loan, federal
student loan, Small Business Administration loan, delinquent federal taxes) or has a lien placed
against their property for a debt owed to the Federal government, they are not eligible for VA
guarantee until the delinquent account is brought current, paid or otherwise satisfied.
• Non purchasing spouse credit reminder: 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 AUS findings reference a disputed account, the following requirements apply:
o Disputed accounts must be cleared by the creditor and the AUS findings must be
reissued referencing a new credit report.
o A credit supplement is not acceptable; a new credit report is required.
o Note: Contact corporate support for exceptions to this process.
VA IRRRL transactions: the following credit requirements apply:
• There should be no pending foreclosures on any property (including investment properties also
owned by the borrower).
• There should not be any foreclosures or short sales completed in the last 24 months on any
property owned by the borrower.
• There should be no bankruptcy discharged in the last 24 months.
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CREDIT
REQUIREMENTS:
(cont’d)
Loan modifications:
o Refinance transactions on previously modified loans are not permitted.
o New purchase transactions where the borrower’s previous loan was modified and the
property is being retained as a 2nd home or investment property are not permitted.
o New purchase transactions where the borrower’s previous loan was modified and the
property is being sold should be treated with caution and reviewed for delinquencies and
short payoffs.
o Refinances where another property (not the subject property) has a loan modification should
be reviewed with caution to ensure that there was no short refinance (treated as a short
sale).
QUALIFYING: • On the 3/1 ARM and 5/1 ARM the borrower is qualified based on the note rate.
• On loans with buy downs, the borrower is qualified based on the note rate.
• Child support/alimony payments are included in the DTI regardless of the number of
payments remaining.
• Installment debt with <10 payments remaining are not included in the DTI unless the
payment amount is substantial enough to affect the borrowers DTI ratio. VA considers
payments >$100.00 to be substantial.
• Loans secured by a liquid asset (i.e. 401K) are not included in the debt calculation.
• Deferred student loans will be included in the DTI unless the borrower can prove that
payments will not start for at least 12 months after closing
• Paying revolving debt off to qualify is permitted provided the borrower has the funds in
verified assets to pay the account(s) and the payoff is documented (HUD-1).
• Lease payments will be included in the DTI regardless of the number of payments remaining in
the lease.
• Co-signed obligations will not be included in the DTI if there is evidence the primary borrower
has made payments as agreed for the last 12 months (copies of canceled checks, front and
back). A copy of the note must also be provided to show that the person making the payments
is also an obligor on the note. Being placed on title only is not sufficient.
• Contingent liabilities (i.e. property settlement “buy-outs” or court-ordered assignment of debt)
will not be included in the DTI if there is proof the debt belongs to another person. A copy of a
court order, divorce decree or property settlement may provide proof of the contingent debt.
• New purchase transactions where the borrower’s previous loan was modified and the property
is being retained as a 2nd home or investment property are not permitted.
• Mortgage Credit Certificates may not be used as income or to offset housing payment. Stearns
is not participating in any MCC programs at this time.
Departure residence policy:
• If the Veteran is converting a principal residence to an investment property upon purchase
of a new principal residence, the following requirements apply:
• Both the current and the proposed monthly housing expense must be used to qualify
• Rental income may not be used to offset the mortgage payment
• 6 months PITI reserves for both properties must be provided
• The following exceptions allow the Veteran to qualify using 75% of gross rental income to offset
the mortgage payment and the reserve requirement is waived:
• The Veteran is relocating with a new employer, or is transferred by the current employer to
an area not within a reasonable and locally recognized commuting distance, or
• The veteran has documented equity of at least 30% in the existing property. Equity must
be documented with an AIR compliant interior/exterior appraisal.
• The reserve requirement can be waived, and VA policy may be followed, at the
underwriter’s discretion. If this requirement is waived, the underwriter MUST indicate
“exclude investor #4” in the exception dropdown on UW Screen 8. Note – if other investor
exclusions or exceptions apply, this reserve requirement may not be waived.
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QUALIFYING:
(cont’d)
• If the Veteran’s current principal residence is pending sale but it will not close before the
purchase of a new principal residence:
• The PITI on both the pending sale and the subject new property must be included in
qualifying the borrower, and the following must be documented:
• 6 months PITI reserves for both properties OR
• Reserves totaling at least 2 months PITI for both properties if able to document at least
30% equity in the existing property. Equity must be documented with an AIR compliant
interior/exterior appraisal.
• Note: the PITI of the pending sale does not need to be included in qualifying the borrower
if 6 months reserves (or 2 months with documented equity) for both properties is
documented and the following is provided:
• Executed sales contract for the current residence
• Confirmation that any financing contingencies are cleared
• If the Veteran is converting a current principal residence to a 2nd home upon purchase of a
new principal residence:
• Both the current and proposed monthly housing expense must be used to qualify; and
• Minimum 6 months PITI reserves for both properties are required OR
• Reserves totaling at least 2 months PITI for both properties if able to document at least
30% equity in the existing property. Equity must be documented with an AIR compliant
interior/exterior appraisal.
RATIOS: The maximum DTI ratio is 41%.
• A 5% ratio variance is permitted for in-service Veterans.
• Higher ratios may be permitted at the discretion of the underwriter. Compensating factors
must be listed on VA Loan Analysis (VA form 26-6393). Veteran must have 120% of required
residual income verified.
The maximum DTI is 50% regardless of AUS approval (45% with AUS Refer, see “Credit
Requirements” section above)
CALCULATING
LTV/CLTV/VALUE:
Maximum loan amount is based on percentage of VA Eligibility as documented on Certificate of
Eligibility.
• For a purchase transaction where the veteran has full entitlement, the maximum LTV is
100% based on the VA appraiser’s Estimate of value.
• NOTE: The maximum loan amount for veterans with full eligibility and no down
payment is $650,000 including the VA Funding Fee.
• With HELOC subordinate financing, the CLTV should be calculated from the unpaid
principal balance, and the HCLTV should be calculated from the full amount of the
HELOC (whether or not funds have been drawn).
Re-negotiated purchase agreement policy:
• Stearns will not accept re-negotiated purchase agreements that increase the sales price
after the appraisal has been completed if:
􀂃 The appraised value is higher than the contracted sales price provided to the
appraiser, and
􀂃 The new purchase agreement and/or addendum used to modify the sales price is
dated after the appraisal is received, and
􀂃 The only change to the purchase agreement is an increase in sales price.
• If the purchase agreement is re-negotiated after the completion of the appraisal, the loan
to value will be based on the lower of the original purchase price or the appraised value,
unless:
􀂃 A re-negotiation of seller paid closing costs and/or pre-paids occurs if customary for
the market and supported by comparables, not to exceed standard seller
contributions, or
􀂃 An amended purchase agreement for a new construction property is obtained due to
improvements that impact the value. In the event of such changes, an updated
appraisal must be obtained to verify the value of the modifications.
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CALCULATING
LTV/CLTV/VALUE:
For a Streamline Refinance (IRRRL): Maximum loan amount $417,000 (including VA funding
fee). (VA to VA) the maximum loan amount is calculated by completing the VA Interest Rate
Reduction Refinancing Worksheet. (VA Form 26-8923)
Maximum loan amount for cash out refinance:
• Appraised value x 90% (maximum LTV and CLTV)
• The maximum loan amount for cash out refinance is $417,000 including funding fee
• UW must refer to the VA Handbook in any case where the Veteran does not have full
entitlement to ensure a 25% guaranty
• Note: payoff of any non-VA loan is considered a cash out refinance.
SEASONING: At the time of application, the borrower must have made at least 6 payments within the month due
on the VA mortgage being refinanced.
REFINANCES: VA has only two types of refinances: Streamline (IRRRL) and cash-out
Streamline Refinances: (IRRRL)
• Existing loan must be a VA loan. At the time of application, the borrower must have made at
least 6 payments within the month due on the VA mortgage being refinanced.
• An IRRRL must bear a lower interest rate than the loan it is refinancing unless the loan it is
refinancing is an ARM.
• The principal and interest payment on an IRRRL must be less than the principal and interest
payment on the loan being refinanced unless one of the following applies:
o the IRRRL is refinancing an ARM, or
o the term of the IRRRL is shorter than the term of the loan being refinanced.
• If the monthly payment increases by 20% or more, loan must be credit qualified.
• The maximum loan term is the original term of the VA loan being refinanced plus 10 years, not
to exceed 30 years. For example, if the old loan was made with a 15-year term, the term of the
new loan cannot exceed 25 years
• The mortgage payment on the IRRRL must be at least $50.00 less than the current payment.
• Minimum 640 credit score required on streamline refinances. Credit report is required to
validate credit score.
• A verbal VOE is required at funding for streamline refinances.
• A conventional appraisal (full interior/exterior) is required on all VA IRRRLs. Appraised
value must be supported and be equal to or greater than the total loan amount (base loan
amount plus VA funding fee). The veteran can be charged for the cost of this appraisal.
This appraisal must comply with AIR.
• See VA IRRRL Checklist for required file documentation.
• The loan amount is calculated on VA form 26-8923.
• Properties previously owned by the Veteran that are no longer owner occupied are not eligible
for IRRRL regardless of VA guidelines.
• Loan proceeds may only be applied to paying off the existing VA loan and to the costs of
obtaining or closing the IRRRL. Therefore, the general rule is that the borrower cannot receive
cash proceeds from the loan. If necessary, the refinancing loan amount must be rounded down
to avoid payments of cash to the veteran.
• In a limited number of situations, the borrower may receive cash at closing. Some
examples of situations in which VA does not object to the borrower receiving cash are:
o Computational errors
o Changes in final payoff figures
o Upfront fees paid for the appraisal and/or credit report that are later added into the
loan, and
o refund of the escrow balance on the old loan. This often occurs when a party other
than the present holder originates the loan.
• VA does not set a “ceiling” or a specific dollar limitation on cash refunds resulting from
adjustments at closing. However, if a situation involves a borrower receiving more than
$500, consult VA as to its acceptability. Lenders and VA personnel should exercise
common sense when assessing such situations and draw from basic program information
to know the difference between an equity withdrawal and cash from unforeseen
circumstances.
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REFINANCES:
(cont’d)
Cash-out Refinances:
• Paying off the outstanding balance of the existing first mortgage, including any prepayment
penalty.
• Payoff of any non-VA loan is considered a cash out refinance.
• Cash out on properties with no existing lien (free and clear properties) is not permitted.
• Paying off any subordinate lien.
• Financing of closing costs.
• Appraised value x 90% (maximum LTV & CLTV is 90%)
• The maximum loan amount for cash out refinance is $417,000 including funding fee
• UW must refer to the VA Handbook in any case where the Veteran does not have full
entitlement to ensure a 25% guaranty
Payoff of subordinate financing (applies to cash out refinance types):
• Reminder, if open ended subordinate financing such as a HELOC is being paid off and closed
through escrow, documentation of such must be provided as follows:
o The borrower must request that the account be frozen (the payoff statement should
be marked to have the account blocked to further advances and close the
account).
o Obtain a statement from the lender that no advances have been made after the
issuance of the payoff demand.
o Obtain copy of request from borrower (usually held by the closing agent) of their
request to pay off and close the account.
SUBORDINATE
FINANCING:
• Subordinate financing is not permitted for loan amounts >$417,000.
• Secondary financing is acceptable as long as long as the Veteran is not placed in a substantially
worse position than if the entire amount borrowed had been guaranteed by VA.
• Multiple subordinate liens permitted. Contact branch manager for restrictions. Reminder, deed
restrictions and resale restrictions are not permitted.
• Maximum LTV/CLTV 100% for properties in West Virginia. This includes government
assistance programs where the combined loan amount may exceed 100% LTV/CLTV.
• Maximum CLTV for cash out refinances is 90%.
• With HELOC subordinate financing, the CLTV should be calculated from the unpaid principal
balance, and the HCLTV should be calculated from the full amount of the HELOC (whether or
not funds have been drawn).
• The following requirements must be met::
􀂙 The lender must submit documentation disclosing the source, amount, and repayment
terms of the second mortgage and agreement to such terms by the veteran and any coobligors.
􀂙 The second mortgage must be subordinated to the VA-guaranteed loan, that is, the
second mortgage must be in a junior lien position relative to the VA loan.
􀂙 Proceeds of the second mortgage may be used for a variety of purposes, including but not
limited to closing costs or a down payment to meet the secondary market requirements of
the lender but may not be used to cover any portion of a down payment required by VA to
cover the excess of the purchase price over VA’s reasonable value.
􀂙 The veteran must qualify for the second mortgage which is underwritten as an additional
recurring monthly obligation.
􀂙 The rate on the second mortgage may exceed the rate on the VA-guaranteed first,
however, it may not exceed industry standards for second mortgages.
􀂙 The second mortgage should not restrict the veteran’s ability to sell the property any more
than the VA first mortgage. That is, it should be assumable by creditworthy purchasers.
􀂙 There should be a reasonable grace period before a late charge is due or commencement
of foreclosure proceedings in the event of default.
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EMPLOYMENT / INCOME: • Reminder: Income for each borrower to be obligated for the mortgage debt must be analyzed
whether it can reasonably be expected to continue through at least the first 3 years of the
mortgage loan.
• A valid social security number and clear CAIVRS are required for all borrowers.
• The borrower’s employment/income history must be verified for the most recent 2 years.
• Overtime and bonus income may be used if the borrower has received the income for at least
22 months and it is likely to continue.
• A verbal verification of employment is required for salaried and self-employed borrowers. The
VOE must cover 2 years if the borrower has less than 2 years on their current job.
• The salaried borrower’s employment/income is verified with their current employer if their
income is from a non-military source.
• A Verbal Verification of Employment will be performed (for salaried / W2 borrowers)
a maximum of 3 days prior to the NOTE date, and will expire after 10 days (from the date on the
VOE) if the loan is not funded.
• If the borrower’s income is from a military source, a Leave and Earnings Statement (LES) is
required instead of a verification of employment. The LES must meet the following
requirements:
􀂙 The LES must furnish the same information as a VOE.
􀂙 The LES must be no more than 120 days old (180 days for new construction).
􀂙 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.
• If the anticipated closing date of the loan is within 12 months of the Veteran’s release
from active duty, the following additional requirements must be met:
􀂙 The file must include documentation the service member has re-enlisted or
extended his/her period of active duty for >12 month period following the projected
close of the loan. OR
􀂙 The file must contain verification of a valid offer for civilian employment following
the release from active duty. OR
􀂙 A statement from the service member that he/she intends to reenlist or extend their
period of active duty to a date >12 months plus a statement from the borrowers
commanding officer confirming the service member is eligible to reenlist and the
commanding officer has no reason to believe any reenlistment or extension of
active duty will not be granted.
􀂙 Documentation of unusually strong positive underwriting factors such as minimum
10% down payment, significant cash-reserves and evidence of strong ties to the
community with a nonmilitary spouses’ income so high that only minimum income
from the active duty service member is needed to qualify.
• A self-employed borrower’s employment/income is verified by the most recent 2 years federal
tax returns (personal and business required) and YTD P & L.
• Commission earnings also require two years tax returns.
• Non-taxable income may be “grossed-up” a maximum of 20%.
• A signed 4506-T will be processed by Stearns regardless of AUS findings (except IRRRLs).
• 4506T / Tax transcripts: Follow AUS findings for the level of income documentation required.
A signed 4506-T will be processed for at least 1 year regardless of AUS findings except as
noted. The most recent year’s tax transcript is required if income information was used in the
underwriting decision regardless of AUS results. If the most current year’s tax transcripts are
not available the following must be provided:
• the previous year’s transcripts
• evidence that the extension was filed & IRS payment made / or refund received for the
most current year
• most recent 30 days paystubs & most current W2s
• For self employed borrowers, a P&L for the most current tax year is also
required. 1040s that can not be validated, along with payment, can be used in lieu of
this P&L.
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EMPLOYMENT / INCOME
(cont’d)
• Please note that if income for more than the most current year is used, tax returns
and 4506Ts must still be obtained for all years of income used.
• 4506T must be processed for most current year and show “no record"
• Mortgage Credit Certificates may not be used as income or to offset housing payment.
Stearns is not participating in any MCC programs at this time.
Military Income Base Pay:
• Consider the applicant’s base pay as stable and reliable unless the applicant is within 12
months of release from active duty:
• Analyze any additional documentation submitted.
• If the applicant will not be reenlisting, determine whether 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.
• Non-taxable military income (BAH, BAS) may be “grossed-up” 20%.
Basic Allowance for Housing:
• The lender may include a basic allowance for housing in effective income if properly verified.
• The basic allowance for housing is not taxable income.
• The lender must ensure that the applicant meets the occupancy requirements set forth in
section 5 of chapter 3.
Subsistence and Clothing Allowances
• Any subsistence (rations) and clothing allowances are indicated on the LES.
• 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.
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.
• Examples include propay, flight or hazard pay, overseas pay and combat pay.
• All of these sources 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.
Note: 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.
Participation in Reserves/National Guard:
􀂙 Lenders must consider if an applicant, whose income is being used to qualify for a loan, may
have a change in income due to participation in a Reserves/ National Guard unit subject to
activation. If so, 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.
Recently Discharged Veterans:
• 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.
Prospects for Continued Employment Analysis:
• 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.
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EMPLOYMENT / INCOME
(cont’d)
• For recently discharged veterans who have been in their new jobs only a very short time,
analyze prospects for continued employment as follows:
􀂙 If the duties the applicant performed in the military are similar or directly related to the
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.
Voluntary Separation Payments
Two types of voluntary separation payments are used to facilitate military downsizing:
• Special Separation Benefit (SSB)
􀂙 A one-time lump sum
􀂙 Taxable in the year received, and
􀂙 Treat the same as any substantial cash reserve
• Voluntary Separation Incentive (VSI)
􀂙 Annual payments
􀂙 Taxable in the year received
􀂙 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
Rental Income from a Multi-Unit Property Securing the VA Loan
• The lender must verify cash reserves totaling at least six months mortgage payments
(principal, interest, taxes, and insurance - PITI) AND document of the applicant’s prior
experience for managing rental units or other background involving both property maintenance
and rental.
• The prospective rental income may only be used for qualifying if evidence indicates the
applicant has a reasonable likelihood of success as a landlord AND cash reserves totaling at
least six months mortgage payments are documented.
• The amount of rental income to include in effective income is based on 75 percent of::
􀂙 verified prior rent collected on the units (existing property), or
􀂙 the appraiser’s opinion of the property’s fair monthly rental (proposed construction).
Rental Income from a Property the Borrower Occupied Prior to the New Loan:
• Obtain a copy of the rental agreement on the property, if any.
• 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.
• The lender must document the strength of the local rental market.
• Property depreciation claimed as a deduction on the tax returns may be included in effective
income.
Rental Income from Other Property Not Securing this Loan
• The lender must obtain the following:
􀂙 Documentation the borrower has 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 the rental income generated by the property.
• Rental income verified as stable and reliable may be included in effective income.
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EMPLOYMENT/INCOME:
(cont’d)
• If there is little or no prior rental history on the property make a determination based on
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.
Residual Income:
• VA requires borrowers monthly net earnings be calculated on VA Loan Analysis (VA Form 26-
6393).
• Residual income is calculated based on remaining earnings once all monthly obligations: debt
liabilities, PITI + maintenance expense, (i.e. subject property square footage x $.14)
withholding taxes, FICA and Medicare have been deducted.
• Grossed up amount of non-taxable income should not be used to calculate residual
income. Use the base income amount.
• 1003 should always be completed for dependents in order to correctly calculate residual
income, even if there are no dependents.
• VA residual income requirement is based on family size and the location of subject property per
the chart :
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
Over 5 Add $80.00 for each additional family member up to 7
Reduce the residual income figure (from the above chart) by a minimum of five 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 five percent unless the VA office of jurisdiction has established a higher percentage, in which
case, apply the specified percentage for that jurisdiction
ASSETS: • Assets must be liquid and or must be readily converted to cash. Assets must be converted to
cash without retirement or job termination.
• Liquid assets include checking accounts, savings accounts, CD’s, gifts, money market, mutual
funds, stock, trust funds, net equity, bridge loans, bonds, secured borrowed funds, etc.
• Funds from personal assets that are sold prior to closing are acceptable as long as the individual
purchasing the asset is not a party to either the property sale transaction or the mortgage
financing transaction. The ownership of the asset and the value of the asset must be
documented. The borrower must provide a bill of sale and proof of receipt of funds.
• Assets such as 401(k), IRS, thrift savings plans etc. may be used for cash reserves up to 60% of
value unless the borrower can document a higher percentage may be withdrawn after
subtracting any federal income tax and withdrawal penalties.
• Funds borrowed against 401(k), IRA, thrift savings plans, etc. may be used for loan closing, may
not be considered cash reserves.
• Business assets may be used for down payment and closing costs as follows:
o The borrower must be the sole proprietor or 100% owner of the business or provide
verification from the other owners that the borrower has access to the funds.
o The accountant must comment on what impact the withdrawal of the funds will have on
the business. If the accountant states that there will be a negative impact, the use of the
funds will not be permitted.
o Business funds are not an eligible source of funds for cash reserves.
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CASH RESERVES: • Cash reserves are not required on 1 unit properties.
• On 2-4 unit properties, 6 months PITI is required for reserves when rental income is used to
qualify.
• Funds borrowed against 401(k), IRA, thrift savings plans, etc. may not be used for cash
reserves.
• Assets such as equity in other properties and the proceeds from a cash-out refinance may not
be used for cash reserves.
• Gift funds may not be used for reserves.
• Business funds are not an eligible source of funds for cash reserves.
GIFTS/ DOWN
PAYMENT:
Down Payment:
• The amount of available VA Entitlement must be 25% of the lesser of the sales price or
appraised value. If the If the Veteran does not have sufficient eligibility to cover 25% of the
lesser of the sales price or the appraiser value, or if the total loan amount is higher than the
county limit for a one unit dwelling, a down payment would be required to meet the 25%.
• The maximum guaranty that VA will provide is 25% of the maximum county limits. The
maximum loan amount for a 100% LTV/CLTV purchase transaction with full entitlement,
including the VA Funding Fee, is $650,000.
Gifts:
• Gifts are permitted.
• Gifts must come from a relative, domestic partner or fiancé.
• Cash on hand is not an acceptable source of gift funds.
• A gift letter must be provided and include the name, address and telephone number of the
donor, the relationship to the borrower, state the dollar amount of the gift and that no
repayment is expected or required.
• If the gift funds are already in the borrowers account the transfer of funds must be documented
by obtaining a copy of the canceled check or other withdrawal documents showing the
withdrawal from the donors personal account along with the homebuyers deposit slip or bank
statement that shows the deposit.
• If the gift funds are not already in the borrowers account, transfer of the gift funds to the
borrowers account or to escrow (or the closing agent) must be documented. Acceptable
documentation is a copy of the certified check and a bank statement showing withdrawal from
the donors account.
• If the gift funds were borrowed and the donor cannot provide documentation the monies were
in a bank account, the donor must provide evidence the funds were borrowed from an
acceptable source. (i.e. Not a party to the transaction.)
DOCUMENTATION
TYPES:
• Loan applications on this program must be fully documented.
• Income, employment and assets are fully documented and verified.
• A Verbal Verification of Employment will be performed (for salaried / W2 borrowers)
a maximum of 3 days prior to the NOTE date, and will expire after 10 days (from the date on the
VOE) if the loan is not funded.
• 4506T / Tax transcripts: Follow AUS findings for the level of income documentation required.
A signed 4506-T will be processed for at least 1 year regardless of AUS findings except as
noted. The most recent year’s tax transcript is required if income information was used in the
underwriting decision regardless of AUS results. If the most current year’s tax transcripts are
not available the following must be provided:
• the previous year’s transcripts
• evidence that the extension was filed & IRS payment made / or refund received for the
most current year
• most recent 30 days paystubs & most current W2s
• For self employed borrowers, a P&L for the most current tax year is also
required. 1040s that can not be validated, along with payment, can be used in lieu of
this P&L.
• Please note that if income for more than the most current year is used, tax returns
and 4506Ts must still be obtained for all years of income used.
• 4506T must be processed for most current year and show “no record"
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SECTION 6: PROPERTY/APPRAISALS
ELIGIBLE PROPERTIES: Eligible Properties are attached & detached SFR, 2-4 units, VA approved condo projects and PUD
units.
Condition of Property: For all real estate transfers (purchase transactions). All properties
must be habitable and all appliances, plumbing, electrical, etc. must be functional and in good
working condition. A stove is not required in the case where a stand-alone appliance can be
placed. If the kitchen has built in appliances, a stove/oven must be installed. The lack of a stove or
oven can not pose any health or safety hazard, otherwise installation is required prior to closing.
Properties must be in marketable condition at the time of closing. “Marketable” means the property
could be sold in its current condition if necessary. Properties with kitchen/bath that are currently
being remodeled, or properties missing flooring (bare, unfinished cement floor) are not considered
in marketable condition and are not acceptable. These deficiencies must be completed prior to
closing.
2-4 units: The Veteran must have a documented history of having prior landlord or property
management experience. Requires 6 months PITI for reserves. The rental income vacancy
rate = 25%. (not applicable to IRRRL)
Condos must be approved by VA. Condos in Florida not permitted.
Modular Housing is acceptable. Modular housing is prefabricated, panelized or sectional housing
that assumes the characteristics of a site built home, meets all local and state building codes, is
permanently affixed to the land and is legally classified as real estate. At least one comparable sale
must be of a modular home.
Listed Properties/Refinance Transactions: Properties may not be currently listed at the time of
application.
• The property listing agreement must be cancelled a minimum of 1 day prior to the application
date.
• A copy of the cancelled/expired listing must be included in the file.
• Appraiser must note that the property is not currently listed.
• The borrower must confirm the intent to occupy the property.
• For cash out refinances where property has been previously listed within the last 6 months, the
maximum LTV/CLTV/HCLTV is 70%.
Non-permitted additions: Non-permitted living space is allowed with the following requirements:
• Appraisal must comment that any addition was completed in a workmanlike manner.
• Appraiser to comment that the addition conforms to the main home structure
• Appraiser to comment if there are any health or safety issues
• Value MUST be given to any conversion or addition (may be positive or negative)
Property Flipping: If the owner (individual or entity other than the Mortgage holder) sells a property
within 90 days after the date of acquisition, the property is eligible for financing.
• Note the following additional guidance regarding property flips:
o Maximum 2 title transfers in last 90 days, 2nd signature at the branch level (u/w
manager, ops manager, branch manager) may approve exceptions for more than
2 transfers.
o Non arms length transactions not permitted on flips
o No double escrows or assignment of sales contract
o Seller of record must own the property at the time of the purchase contract
Legal-non conforming use: Follow VA guidance.
INELIGIBLE
PROPERTIES:
Condos in Florida not permitted.
Ineligible properties: condotels, kiddie condos, timeshares, cooperatives, unique properties,
unimproved land, commercial properties, manufactured homes, properties with deed restrictions,
properties on Indian leased land.
• Properties with unexpired redemption period are ineligible: Certain state laws provide for a
“redemption period” after a foreclosure or tax sale has occurred, during which time the prior
owner may reclaim the property upon payment of all amounts owed. Unexpired redemption
periods create an unacceptable title defect on the subject property, and do not conform to the
existing policy that requires the property to have “good and marketable” title. The purchase of
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