VA Home Loan Income Requirements

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

Determining Income Eligibility for VA Loans

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

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

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

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

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

VA home loan eligibility requirements involve meeting specific income guidelines. To be considered for VA loan programs, you must be employed for at least 30 hours a week and have a two-year steady income history.

Lenders will review your receipts or pay stubs to verify this. If you receive disability or retirement income, you must show a steady history of receiving it for at least two years. If you're self-employed, your most recent federal income tax filings will be used to determine your eligible income. You'll also need to provide a certificate of eligibility. It's essential to meet these guidelines to qualify for a VA home loan and cover the expense of homeownership.

Documentation of Income

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

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

Building Trades or Other Seasonal or Climate-Dependent Employment

The lender will ask for the following if the applicant works seasonal or in the construction trades.

According to the VA underwriting manual, income analysis is not an exact science. The following criteria must be used to evaluate each loan separately by the lender. The underwriter must look at the following to determine the likelihood of continuous work (i.e., if income is steady and reliable):

• applicant's past employment record,
• applicant's training, education, and qualifications for their position,
  common sense
• documentation evidencing the applicant's total year-to-date earnings
• Flexibility when warranted.
• signed and dated individual income tax returns for the previous two years, and if the applicant works out of a union,
• evidence of the union's history with the applicant's judgment, and 
• Type of employment, and employer's confirmation of continued work, if provided.

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

Less Than 12 Months of Employment

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

Suppose the probability of continued employment is high. In that case, lenders may consider including the income in the adequate total income, explaining why the income of fewer than 12 months was used.

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

Recent and Frequent Changes in Employment

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

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

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

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

For a source of income to be considered reliable, it must meet specific criteria. 

Firstly, the income must be regular and predictable to ensure the applicant has steady funds. 

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

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

Commission Income

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

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

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

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

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

Income From Self-Employment

When a buyer applies for a residential mortgage, they must show the lender their income tax returns, balance sheets, and profit and loss statements. These documents will help the lender determine how much money the buyer has left after paying their monthly bills and expenses, which will vary based on their income and other factors.

In addition, some lenders may consider other money topics such as an allowance, compensating factors, and credit reports to decide. They will also determine what monthly payments the buyer can afford and if there are any risks associated with lending them money.

Overall, buyers must have excellent financial standing and show proof of their income to get approved for a residential mortgage.

Conclusion

Analyzing an applicant's monthly income is one of the most challenging tasks for an underwriter. They must carefully assess the applicant's income sources and stability and their ability to provide reliable and sufficient income in the foreseeable future. With the VA's flexible income requirements, underwriters can give favorable consideration to applicants and reach an appropriate conclusion. You to get personalized counsel from experts in your area.