Page images


(2) Active-duty, Reserve, or National high that only minimal income fro Guard applicants. (i) In the case of an the active duty servicemember active-duty applicant, a military Leave member of the Reserves or Nation & Earnings Statement is required and Guard is needed to qualify. will be used instead of an employment (iii) Each active-duty member wi verification. The statement must be no applies for a loan must be counsel more than 120 days old (180 days for through the use of VA Form 26-05! new construction) and must be the Counseling Checklist for Milita original or a lender-certified copy of Homebuyers. Lenders must submit the original. For loans closed auto- signed and dated VA Form 26-0592 wi matically, this requirement is satisfied each prior approval loan application if the date of the Leave & Earnings automatic loan report involving a ba Statement is within 120 days (180 days rower on active duty. for new construction) of the date the (3) Income reliability. Income receiv note is signed. For prior approval by the borrower and spouse is to loans, this requirement will be consid- used only if it can be concluded th: ered satisfied if the verification of em- the income will continue during ti ployment is dated within 120 days of foreseeable future and, thus, should I the date the application is received by properly considered in determinir

ability to meet the mortgage pa (ii) For servicemembers within 12 ments. If an employer puts N/A or ot! months of release from active duty, or erwise declines to complete members of the Reserves or National verification of employment stateme Guard within 12 months of release, one regarding the probability of continu of the following is also required:

employment, no further action is i (A) Documentation that the quired of the lender. Reliability will l servicemember has in fact already re- determined based on the duration enlisted or extended his/her period of the borrower's current employment ti active duty or Reserve or National gether with his or her overall doc Guard service to a date beyond the 12- mented employment history. There ci month period following the projected be no discounting of income solely be closing of the loan.

cause it is derived from an annuit (B) Verification of a valid offer of pension or other retirement benefit, local civilian employment following re- from part-time employment. Howeve lease from active duty. All data perti unless income from overtime work ar nent to sound underwriting procedures part-time or second jobs can be a (date employment will begin, earnings, corded a reasonable likelihood that etc.) must be included.

is continuous and will continue in th (C) A statement from the foreseeable future, such income shoul servicemember that he/she intends to not be used. Generally, the reliabilit reenlist or extend his/her period of ac- of such income cannot be demonstrate tive duty or Reserve or National Guard unless the income has continued for : service to a date beyond the 12 month years. The hours of duty and othe period following the projected loan work conditions of the applicant's pri closing date, and a statement from the mary job, and the period of time i servicemember's commanding officer which the applicant was employe confirming that the servicemember is under such arrangement, must be suc eligible to reenlist or extend his/her ac as to permit a clear conclusion as to tive duty or Reserve or National Guard good probability that overtime or part service as indicated and that the com- time or secondary employment can an manding officer has no reason to be will continue. Income from overtim lieve that such reenlistment or exten work and part-time jobs not eligible fo sion will not be granted.

inclusion as primary income may, 1 (D) Other unusually strong positive properly verified for at least 12 months underwriting factors, such as a down- be used to offset the payments due 01 payment of at least 10 percent, signifi- debts and obligations of an inter cant cash reserves, or clear evidence of mediate term, i.e., 6 to 24 months. Suc strong ties to the community coupled income must be described in the loa with a nonmilitary spouse's income so file. The amount of any pension o

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 assist ance programs is used to qualify for a loan if it can be determined that the income will probably continue for 3

(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-toincome 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

years or more.

the extent it can be determined such that the waiting lists for on-base hou income will continue.

ing are so long that it is improbabl (iii) Income received specifically for that individuals desiring to purchas the care of any foster child(ren) may be off-base housing would be preclude counted as income if documented. Gen- from doing so in the foreseeable future erally, however, such foster care in If stations make such a determination come is to be used only to balance the a release shall be issued to inform len expenses of caring for the fosterers. child(ren) against any increased resid (7) Automobile (or similar) allowanc ual income requirements.

Generally, automobile allowances ar (6) Military quarters allowance. With paid to cover specific expenses relate respect to off-base housing (quarters) to an applicant's employment, and it allowances for service personnel on ac- appropriate to use such income to of tive duty, it is the policy of the De set a corresponding car payment. How partment of Defense to utilize avail- ever, in some instances, such an allo able on-base housing when possible. In ance may exceed the car payment order for a quarters allowance to be with proper documentation, incom considered as continuing income, it is from a car allowance which exceeds th necessary that the applicant furnish car payment can be counted as effec written authorization from his or her tive income. Likewise, any other simi commanding officer for off-base hous- lar type of allowance which exceeds th ing. This authorization should verify specific expense involved may be adde that quarters will not be made avail. to gross income to the extent it is doc able and that the individual should umented to exceed the actual expense make permanent arrangements for (8) Commissions. When all or a majo nonmilitary housing. A Department of portion of the veteran's income is de Defense form, DD Form 1747, Status of rived from commissions, it will be nec Housing Availability, is used by the essary to establish the stability of suc Family Housing Office to advise per- income if it is to be considered in th sonnel regarding family housing. The loan analysis for the repayment of thi applicant's quarters allowance cannot mortgage debt and/or short-term obli be considered unless item b (Perma- gations. In order to assess the value o nent) or d is completed on DD Form such income, lenders should obtain 1747, dated October 1990. Of course, if written verification of the actua. the applicant's income less quarters al amount of commissions paid to date lowance is sufficient, there is no need the basis for the payment of such com for assurance that the applicant has missions and when commissions are permission to occupy nonmilitary paid; i.e., monthly, quarterly, semi housing provided that a determination annually, or annually. Lenders should can be made that the occupancy re- also obtain signed and dated individual quirements of the law will be met. income tax returns, plus applicable Also, authorization to obtain off-base schedules, for the previous 2 years, or housing will not be required when cer- for whatever additional period 18 tain duty assignments would clearly deemed necessary to properly dem qualify service personnel with families onstrate a satisfactory earnings record. for quarters allowance. For instance, The length of the veteran's employ. off-base housing authorizations need ment in the type of occupation 10 not be obtained for service personnel which commissions are paid is also an stationed overseas who are not accom- important factor in the assessment o panied by their families, recruiters on the stability of the income. If the vetdetached duty, or military personnel eran has been employed for a relatively stationed in areas where no on-base short time, the income should not nor housing exists. In any case in which no mally be considered stable unless the off-base housing authorization is ob product or service was the same of tained, an explanation of the cir- closely related to the product or serv cumstances justifying its omission ice sold in an immediate prior position: must be included with the loan applica- Generally, income from commissions tion except when it has been estab- considered stable when the applicant lished by the VA facility of jurisdiction has been receiving such income for

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 selfemployment 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:

(1) 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 à 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 selfemployed, 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 can be made, the income iron 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

[blocks in formation]

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 thi section are similarly applicable to ap plicants whose employment is of short duration. Such cases will entail carefu consideration of the employer's con firmation of employment, probabilit of permanency, past employmen record, the applicant's qualification for the position, and previous training including that received in the militar service. In the event that such consid erations do not enable a determinatio that the income from the veteran current position has a reasonable like lihood of continuance, such incom should not be considered in the anal ysis. Applications received from per sons employed in the building trade or in other occupations affected by cli matic conditions, should be supporte by documentation evidencing the ap plicant's total earnings to date an covering a period of not less than year as well as signed and dated copie of complete income tax returns, inclu ing all schedules for the past 2 years for whatever additional period i deemed necessary to properly dem onstrate a satisfactory earnings recor If the applicant works out of a union evidence of the previous year's eari ings should be obtained together with verification of employment from th current employer.

(12) Rental income-(i) Multi-unit sut ject property. When the loan pertains t a structure with more than a one-fam ily dwelling unit, the prospective rent al income will not be considered unles the veteran can demonstrate a reason able likelihood of success as a landlord and sufficient cash reserves are verifie to enable the veteran to carry th mortgage loan payments (principal, in terest, taxes, and insurance) withou assistance from the rental income for : period of at least 6 months. The deter mination of the veteran's likelihood a success as a landlord will be based on documentation of any prior experience in managing rental units or other col lection activities. The amount of rent al income to be used in the loan anal ysis will be based on 75 percent of th amount indicated on the lease or renta agreement, unless a greater percentage can be documented.

« PreviousContinue »