How VA Loan Mortgage Underwriting Works in California

When you apply for a VA loan in California, your loan file will go through several stages before reaching the final funding. One of those stages involves mortgage underwriting. And we’ve learned over the years that borrowers tend to have a lot of questions on this subject.

Today, we will examine the VA mortgage loan underwriting process, what it involves, and how it affects you as a home buyer. Once you understand how the process unfolds, you’ll have an easier time preparing and knowing what to expect.

What Is Mortgage Underwriting, Exactly?

Mortgage underwriting is a process where a lender evaluates a borrower’s financial situation and the property they want to buy. It occurs after the home buyer has signed a purchase agreement but before the final closing. In a way, mortgage underwriting paves the way for the closing process.

In California, all types of home loans go through an underwriting stage. This is true for VA, FHA and conventional mortgage loans alike. The VA loan underwriting process involves many of the same steps that take place with a conventional or “regular” mortgage loan, though there are a few key differences.

The purpose of mortgage underwriting is to assess the risk of lending money to the borrower.

All mortgage loans involve risk. In a typical home-buying scenario in California, the lender invests more money than the borrower does. Mortgage underwriting helps to reduce risk by ensuring the borrower has the capacity to repay the loan.

What Do VA Loan Underwriters Look for?

In California, mortgage underwriters consider a variety of factors to make a determination. This includes the borrower’s credit history, income, employment, assets, liabilities, and debt-to-income ratio.

The VA loan underwriting process can vary from one borrower to another. Every borrower has their own unique financial situation and credit history. But in general, the mortgage underwriter will perform the following steps when underwriting a VA loan file in California:

• Review credit reports and scores to assess the borrower’s creditworthiness.
• Verify income and employment to ensure the borrower can afford the monthly mortgage payments.
• Analyze assets and liabilities to determine the borrower’s overall financial health.
• Use the appraisal to ensure the home is worth at least the amount of the loan.
• Evaluate the borrower’s debt-to-income ratio (DTI) to ensure it is within acceptable limits.
• Review the borrower’s down payment and cash reserves to make sure they have sufficient funds to close on the loan.
• Make a recommendation to approve or deny the loan, based on the above research.

If the underwriter determines that the borrower is a good credit risk and the property is a suitable investment, they will approve the loan. However, if the underwriter has any concerns, they may deny the loan or request additional documentation from the borrower.

Again, much of this process is the same for both VA and conventional loans.

What’s the Next Step?

VA loan underwriting in California typically results in one of three scenarios. The mortgage underwriter might approve the loan and “clear” the borrower for the final closing, request additional information, or (less often) recommend that the loan be denied.

As a home buyer, you obviously want to have the first scenario — a full approval based on the initial underwriting review. In this case, you can proceed to the closing, sign all of the finalized documents, and get the keys to your new house!

In some cases, the VA loan underwriter will require additional information or documents in order to make a final call. A common example is what’s referred to as the “letter or explanation.” This happens when the underwriter asks the borrower to provide a written explanation relating to a financial transaction, income, employment, etc.

Here are some of the additional items a mortgage underwriter might need the borrower to provide before “signing off” on the loan:

• A letter of explanation regarding any unusual or large deposits or withdrawals on the borrower’s bank statements
• Documentation of any gifts or loans that the borrower is using to cover the down payment or closing costs
• A copy of the borrower’s most recent pay stub
• W-2 forms or tax returns from the previous year
• A divorce decree or child support agreement (if applicable)
• Bankruptcy discharge paperwork
• Recent investment statements

In all cases, the purpose for the request is the same. The underwriter needs to perform due diligence to ensure that the borrower has the financial means to repay the loan.

In the case of VA home loans, the underwriter will also want to see that the home meets the minimum property requirements for that program. This is one way that the VA mortgage underwriting process in California differs slightly from the process used for conventional loans.

VA Loans Are More Likely to Be Approved

In some cases, the VA mortgage loan underwriting process will result in a denial. This occurs when the underwriter determines that the borrower and/or the property does not qualify for VA loan financing.

Loan denial is less common when compared to the approval and additional request scenarios mentioned above. In fact, the data show that VA home loans in California are more likely to be approved than both FHA and conventional mortgage loans.

According to the Home Mortgage Disclosure Act (HMDA) data from last year, about 12% of VA loan applications were denied. That was a lower denial rate than conventional and FHA-insured mortgage loans.

Have Questions? If you are planning to buy a home in California with a VA loan, Bridgepoint Funding can help! We specialize in this program and have many years of experience processing VA loans. We can answer your mortgage questions and help you prepare for the process.