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(ii) Rental of existing home. Proposed any appropriate similar State withrental of a veteran's existing property holding charts to arrive at the amount may be used to offset the mortgage of Federal and State income tax to be payment on that property, provided deducted from gross income. there is no indication that the property (14) Mortgage credit certificates. (i) The will be difficult to rent. If available, a Internal Revenue Code (26 U.S.C.) as copy of the rental agreement should be amended by the Tax Reform Act of obtained. It is the responsibility of the 1984, allows states and other political loan underwriter to be aware of the subdivisions to trade in all or part of condition of the local rental market. their authority to issue mortgage revFor instance, in areas where the rental enue bonds for authority to issue market is very strong the absence of a MCCs. Veterans who are recipients of lease should not automatically pro- MCCs may realize a significant reduchibit the offset of the mortgage by the tion in their income tax liability by reproposed rental income.
ceiving a Federal tax credit for a per(iii) Other rental property. If income centage of their mortgage interest payfrom rental property will be used to ment on debt incurred on or after Janqualify for the new loan, the docu- uary 1, 1985. mentation required of a self-employed (ii) Lenders must provide a copy of applicant should be obtained together the MCC to VA with the home loan apwith evidence of cash reserves equaling plication. The MCC will specify the 3 months PITI on the rental property. rate of credit allowed and the amount As for any self-employed earnings (see of certified indebtedness; i.e., the inparagraph (f)(7) of this section), depre- debtedness incurred by the veteran to ciation claimed may be added back in acquire a principal residence or as a as income. In the case of a veteran who qualified home improvement or rehahas no experience as a landlord, it is bilitation loan. unlikely that the income from a rental (iii) For credit underwriting purproperty may be used to qualify for the poses, the amount of tax credit allowed new loan.
to a veteran under an MCC will be (13) Tares and other deductions. De treated as a reduction in the monthly ductions to be applied for Federal in Federal income tax. For example, à come taxes and Social Security may be veteran having a $600 monthly interest obtained from the Employer's Tax payment and an MCC providing a 30Guide (Circular E) issued by the Inter- percent tax credit would receive a $180 Dal Revenue Service (IRS). (For vet- (30 percentx$600) tax credit each erans receiving a mortgage credit cer- month. However, because the annual tificate (MCC), see paragraph (f)(14) of tax credit, which amounts to $2,160 this section.) Any State or local taxes (12x$180), exceeds $2,000 and is based on should be estimated or obtained from a 30-percent credit rate, the maximum charts similar to those provided by IRS tax credit the veteran can receive is which may be available in those states limited to $2,000 per year (Pub. L. 98– with withholding taxes. A determina- 369) or $167 per month ($2,000/12). As a tion of the amount paid or withheld for consequence of the tax credit, the inretirement purposes should be made terest on which a deduction can be and used when calculating deductions taken will be reduced by the amount of from gross income. In determining the tax credit to $433 ($600 - $167). This whether a veteran-applicant meets the reduction should also be reflected when income criteria for a loan, some con calculating Federal income tax. sideration may be given to the poten- (iv) For underwriting purposes, the tial tax benefits the veteran will real amount of the tax credit is limited to ize if the loan is approved. This can be the amount of the veteran's maximum done by using the instructions and tax liability. If, in the example in paraworksheet portion of IRS Form W-4, graph (f)(14)(iii) of this section, the vetEmployee's Withholding Allowance eran's tax liability for the year were Certificate, to compute the total num- only $1,500, the monthly tax credit ber of permissible withholding allow would be limited to $125 ($1,500/12). ances. That number can then be used (8) Credit. The conclusion reached as when referring to IRS Circular E and to whether or not the veteran and spouse are satisfactory credit risks itself disqualify the loan. However, in must also be based on a careful anal- such cases it is necessary to develop ysis of the available credit data. Regu- complete information as to the facts lation B (12 CFR part 202), promulgated and circumstances concerning the by the Federal Reserve Board pursuant bankruptcy. Generally speaking, when to the Equal Credit Opportunity Act, the borrower or spouse, as the case requires that lenders, in evaluating may be, has been regularly employed creditworthiness, shall consider, on the
(not self-employed) and has been disapplicant's request, the credit history, charged in bankruptcy within the last when available, of any account re
one to two years, it probably would not ported in the name of the applicant's be possible to determine that the borspouse or former spouse which the ap- rower or spouse is a satisfactory credit plicant can demonstrate accurately re risk unless both of the following reflects the applicant's creditworthiness.
quirements are satisfied: In other than community property
(i) The borrower or spouse has obstates, if the spouse will not be con
tained credit subsequent to the banktractually obligated on the loan, Regu
ruptcy and has met the credit paylation B prohibits any request for or
ments in a satisfactory manner over a consideration of information about the
continued period; and spouse concerning income, employ
(ii) The bankruptcy was caused by ment, assets or liabilities. In commu
circumstances beyond the control of nity property states, information con
the borrower or spouse, e.g., unemploycerning a spouse may be requested and
ment, prolonged strikes, medical bills considered in the same manner as that
not covered by insurance. Divorce is for the applicant. (1) Adverse data. If the analysis devel
not generally viewed as beyond the
control of the borrower and/or spouse. ops any derogatory credit information and, despite such facts, it is deter
The circumstances alleged must be mined that the veteran and spouse are
verified. If a borrower or spouse is selfsatisfactory credit risks, the basis for
employed, has been adjudicated bankthe decision must be explained. If a
rupt, and subsequently obtains a perveteran and spouse have debts out
manent position, a finding as to satisstanding which have not been paid
factory credit risk may be made protimely, or which they have refused to
vided there is no derogatory credit inpay, the fact that the outstanding
formation prior to self-employment, debts are paid after the acceptability
there is no derogatory credit informaof the credit is questioned or in antici
tion subsequent to the bankruptcy, and pation of applying for new credit does
the failure of the business was not due not, of course, alter the fact that the
to misconduct. If a borrower or spouse record for paying debts has been unsat
has been discharged in bankruptcy isfactory. With respect to unpaid debts,
within the past 12 months, it will not lenders may take into consideration a generally be possible to determine that veteran's claim of bona fide or legal de
the borrower or spouse is a satisfactory fenses, Such defenses are not applica credit risk. ble when the debt has been reduced to (3) Petition under chapter 13 of Bankjudgment. Where a collection account ruptcy Code. A petition under chapter has been established, if it is determined 13 of the Bankruptcy Code (11 U.S.C.) that the borrower is a satisfactory filed by the borrower or spouse is indiccredit risk, it is not mandatory that ative of an effort to pay their creditors. such an account be paid off in order for Some plans may provide for full paya loan to be approved. Court-ordered ment of debts while others arrange for judgments, however, must be paid off payment of scaled-down debts. Regular before a new loan is approved,
payments are made to a court-ap(2) Bankruptcy. When the credit infor- pointed trustee over a 2- to 3-year pemation shows that the borrower or riod (or up to 5 years in some cases). spouse has been discharged in bank- When the borrowers have made all payruptcy under the “straight" liquida- ments in a satisfactory manner, they tion and discharge provisions of the may be considered as having reestabbankruptcy law, this would not in lished satisfactory credit. When they
apply for a home loan before comple- ment is paid or otherwise satisfied. Of tion of the payout period, favorable course, the applicant must also be able consideration may nevertheless be to otherwise qualify for the loan from given if at least 12 months' worth of an income and remaining credit standpayments have been made satisfac point. Refinancing under VA's interest torily and the Trustee or Bankruptcy rate reduction refinancing provisions, Judge approves of the new credit.
however, is allowed even if the bor(4) Foreclosures. (i) When the credit rower is delinquent on the VA guaraninformation shows that the veteran or teed mortgage being refinanced. Prior spouse has had a foreclosure on a prior approval processing is required in such mortgage; e.g., a VA-guaranteed or cases. HUD-insured mortgage, this will not in (6) Absence of credit history. The fact itself disqualify the borrower from ob- that recently discharged veterans may taining the loan. Lenders and field sta- have had no opportunity to develop a tion personnel should refer to the pre- credit history will not preclude a deterceding guidelines on bankruptcies for mination of satisfactory credit. Simicases involving foreclosures. As with a larly, other loan applicants may not borrower who has been adjudicated have established credit histories as a bankrupt, it is necessary to develop result of a preference for purchasing complete information as to the facts consumer items with cash rather than and circumstances of the foreclosure. credit. There are also cases in which
(ii) When VA pays a claim on a VA- individuals may be genuinely wary of guaranteed loan as a result of a fore- acquiring new obligations following closure, the original veteran may be re bankruptcy, consumer credit counquired to repay any loss to the Govern seling (debt proration), or other disrupment. In some instances VA may waive tive credit occurrence. The absence of the veteran's debt, in part or totally, the credit history in these cases will based on the facts and circumstances of not generally be viewed as an adverse the case. However, guaranty entitle factor in credit underwriting. However, ment cannot be restored unless the before a favorable decision is made for Government's loss has been repaid in cases involving bankruptcies or other full, regardless of whether or not the derogatory credit factors, efforts debt has been waived, compromised, or should be made to develop evidence of discharged in bankruptcy. Therefore, a timely payment of non-installment veteran who is seeking a new VA loan debts such as rent and utilities. It is after having experienced a foreclosure anticipated that this special consideron a prior VA loan will in most cases ation in the absence of a credit history have only remaining entitlement to following bankruptcy would be the rare apply to the new loan. The lender case and generally confined to bankshould assure that the veteran has suf- ruptcies that occurred over 3 years ago. ficient entitlement for its secondary (7) Consumer credit counseling plan. If marketing purposes.
a veteran, or veteran and spouse, have (5) Federal debts. An applicant for a prior adverse credit and are particiFederally-assisted loan will not be con- pating in a Consumer Credit Counsidered a satisfactory credit risk for seling plan, they may be determined to such loan if the applicant is presently be a satisfactory credit risk if they delinquent or in default on any debt to demonstrate 12 months' satisfactory the Federal Government, e.g., a Small payments and the counseling agency Business Administration loan, a U.S. approves the new credit. If a veteran, Guaranteed Student loan, a debt to the or veteran and spouse, have good prior Public Health Service, or where there credit and are participating in a Conis a judgment lien against the appli sumer Credit Counseling plan, such cant's property for a debt owed to the participation is to be considered a neuGovernment. The applicant may not be tral factor, or even a positive factor, in approved for the loan until the delin determining creditworthiness. quent account has been brought cur- (8) Re-establishment of satisfactory rent or satisfactory arrangements have credit. In circumstances not involving been made between the borrower and bankruptcy, satisfactory credit is genthe Federal agency owed, or the judg- erally considered to be reestablished after the veteran, or veteran and loans, this requirement will be considspouse, have made satisfactory pay- ered satisfied if the date of the credit ments for 12 months after the date of report or verification is within 120 days the last derogatory credit item.
of the date of the application is re(9) Long-term v. short-term debts. All ceived by VA. Of major significance are known debts and obligations including the applicant's rental history and outany alimony and/or child support pay- standing or recently retired mortgages ments of the borrower and spouse must if any, particularly prior VA loans. be documented. Significant liabilities, Lenders should be sure ratings on such to be deducted from the total income accounts are obtained; a written explain determining ability to meet the nation is required when ratings are not mortgage payments are accounts that, available. A determination is necessary generally, are of a relatively long as to whether alimony and/or child supterm, i.e., 10 months or over. Other ac port payments are required. counts for terms of less than 10 months Verification of the amount of such obmust, of course, be considered in deter- ligations should be obtained, although mining ability to meet family ex documentation concerning an applipenses. Certainly, any severe impact on cant's divorce should not be obtained the family's resources for any period of automatically unless it is necessary to time must be considered in the loan verify the amount of any alimony or analysis. For example, monthly pay child support liability indicated by the ments of $300 on an auto loan with a re applicant. If in the routine course of maining balance of $1,500 would be in processing the loan application, howcluded in those obligations to be de- ever, direct evidence is received (e.g. ducted from the total income regard from the credit report) that an obligaless of the fact that the account can be tion to pay alimony or child support expected to pay out in 5 months. It is exists (as opposed to mere evidence clear that the applicant will, in this that the veteran was previously dicase, continue to carry the burden of vorced), the discrepancy between the those $300 payments for the first, most loan application and credit report can critical months of the home loan.
and should be fully resolved in the (10) Requirements for verification. If same manner as any other such disthe credit investigation reveals debts crepancy would be handled. When a pay or obligations of a material nature stub or leave-and-earnings statement which were not divulged by the appli- indicates an allotment, the lender cant, lenders must be certain to obtain must investigate the nature of the alclarification as to the status of such lotment(s) to determine whether the debts from the borrower. A proper allotment is related to a debt. Debts analysis is obviously not possible un assigned to an ex-spouse by a divorce less there is total correlation between decree will not generally be charged the obligations claimed by the bor- against a veteran-borrower. rower and those revealed by a credit re- (11) Job-related expenses. Known jobport or deposit verification. Con related expenses should be docuversely, significant debts and obliga- mented. This will include costs for any tions reported by the borrower must be dependent care, significant commuting dated. If the credit report fails to pro- costs, etc. When a family's cirvide necessary information on such ac- cumstances are such that dependent counts, lenders will be expected to ob- care arrangements would probably be tain their own verifications of those necessary, it is important to determine debts directly from the creditors. Cred the cost of such services in order to arit reports and verifications must be no rive at an accurate total of deductions. more than 120 days old (180 days for (12) Credit reports. Credit reports obnew construction) to be considered tained by lenders on VA-guaranteed valid. For loans closed automatically, loan applications must be either a this requirement will be considered three-file Merged Credit Report (MCR) satisfied if the date of the credit report or a Residential Mortgage Credit Reor verification is within 120 days (180 port (RMCR). If used, the RMCR must days for new construction) of the date meet the standards formulated jointly the note is signed. For prior approval by the Department of Veterans Affairs, Federal National Mortgage Associa- properties alike. Maintenance and utiltion, Federal Home Loan Mortgage ity amounts for various types of propCorporation, Federal Housing Adminis- erty should be realistically estimated. tration, Farmers Home Administra- Local utility companies should be contion, credit repositories, repository af- sulted for current rates. The age and filiated consumer reporting agencies type of construction of a house may and independent consumer reporting well affect these expenses. In the case agencies. All credit reports obtained by of condominiums or houses in a the lender must be submitted to VA. planned unit development (PUD), the
(h) Borrower's personal and financial monthly amount of the maintenance status. The number and ages of depend assessment payable to a homeowners ents have an important bearing on association should be added. If the whether income after deduction of amount currently assessed is less than fixed charges is sufficient to support the maximum provided in the covthe family. Type and duration of em- enants or master deed, and it appears ployment of both the borrower and likely that the amount will be insuffispouse are important as an indication cient for operation of the condominium of stability of their employment. The or PUD, the amount used will be the amount of liquid assets owned by the maximum the veteran could be borrower or spouse, or both, is an im charged. If it is expected that real esportant factor in determining that tate taxes will be raised, or if any spethey have sufficient funds to close the cial assessments are expected, the inloan, as well as being significant in creased or additional amounts should analyzing the overall qualifications for be used. In special flood hazard areas, the loan. (It is imperative that ade- include the premium for any required quate cash assets from the veteran's flood insurance. own resources are verified to allow the (j) Lender responsibility. (1) Lenders payment (see $36.4336(a)(3)) of any dif- are fully responsible for developing all ference between the sales price of the credit information; i.e., for obtaining property and the loan amount, in addi- verifications of employment and detion to that necessary to cover closing posit, credit reports, and for the accucosts, if the sales price exceeds the rea- racy of the information contained in sonable value established by VA.) the loan application. Verifications must be no more than 120 (2) Verifications of employment and days old (180 days for new construc deposits, and requests for credit retion) to be considered valid. For loans ports and/or credit information must closed on the automatic basis, this re- be initiated and received by the lender. quirement will be considered satisfied (3) In cases where the real estate if the date of the deposit verification is broker/agent or any other party rewithin 120 days (180 days for new con quests any of this information, the restruction) of the date of the veteran's port(s) must be returned directly to the application to the lender. For prior ap lender. This fact must be disclosed by proval loans, this requirement will be appropriately completing the required considered satisfied if the verification certification on the loan application or of employment is dated within 120 days report and the parties must be identiof the date the application is received fied as agents of the lender. by VA. Current monthly rental or (4) Where the lender relies on other other housing expense is an important parties to secure any of the credit or consideration when compared to that employment information or otherwise to be undertaken in connection with accepts such information obtained by the contemplated housing purchase. any other party, such parties shall be
(1) Estimated monthly shelter expenses. construed for purposes of the submisIt is important that monthly expenses sion of the loan documents to VA to be such as taxes, insurance, assessments authorized agents of the lender, regardand maintenance and utilities be esti- less of the actual relationship between mated accurately based on property lo- such parties and the lender, even if discation and type of house; e.g., old or closure is not provided to VA under new, large or small, rather than using paragraph (j)(3) of this section. Any or applying a “rule of thumb" to all negligent or willful misrepresentation