Page 95
Topic 5: Debts and Obligations
Change Date: February 22, 2019
· This chapter has been revised in its entirety.
a. Verification Requirements for Debts and Obligations
All debts and obligations of the borrowers’ must be verified and rated. Obtain a credit report with all information for all credit bureaus. See Topic 7, subsection a of this chapter for details on the type of credit report required. For obligations not included on the credit report which are revealed on the application or through other means, the lender must obtain a verification of payment history showing the obligation or other written verification directly from the creditor, including the payment amount and outstanding balance.
The lender must also separately verify accounts listed as “will rate by mail only” or “need written authorization.”
When a pay stub(s) or LES indicates an allotment, the lender must investigate the nature of the allotment to determine whether the allotment is related to a debt or other obligation(s). Examples may include 401K obligation or repayment, child care, child support, or other.
For obligations that have not been rated on the credit report or elsewhere, obtain the verification and rating directly from the creditor. Include a written explanation for any obligation that is not rated.
Resolve all discrepancies prior to closing. If the credit report, deposit verification, bank statement, or pay stub(s) reveals any debts or obligations which were not divulged by the borrowers):
· obtain clarification as to the status of such debts from the borrower(s), then
· verify any remaining discrepancies with the creditor.
Page 96
Credit reports and verifications must be no more than 120 days old (180 days for new construction). For automatically closed loans, this means the date of the credit report or verification is within 120 days of the date the note is signed (180 days for new construction).
For prior approval loans, this means the date of the credit report or verification is within 120 days of the date the application is received by VA (180 days for new construction).
ECOA prohibits requests for, or consideration of, credit history and liability information of a spouse who will not be contractually obligated on the loan, except:
· if the borrower(s) is relying on alimony, child support, or maintenance payments from the spouse (or former spouse), or
· in community property states.
a. Verification Requirements for Debts and Obligations,
continued If either of these situations is applicable, the lender
must:
· Obtain a credit report on the non-purchasing spouse in addition to the Veteran’s credit report.
· Consider the spouse’s credit history in reaching a determination. A Veteran borrower with a satisfactory credit history may be considered a satisfactory risk even though the non-purchasing spouse’s credit may be unsatisfactory.
· Include the monthly payment of the non-purchasing spouse’s debts on the VA Form 26- 6393, Loan Analysis. For debts such as judgments and unpaid collection accounts, lenders should consider the Veteran’s capacity to address the debt(s).
· Develop the facts surrounding any unsatisfied judgments on the spouse’s credit report, such as where the judgment was filed and whether the parties were married to one another at the time, and secure a competent legal opinion whether the judgment may become a lien against the property.
· Exclude the monthly payment on the spouse’s debts from the loan analysis when a reliable source of income for the spouse is verified to reach such a conclusion which is voluntarily provided.
· Document VA Form 26-6393, Loan Analysis, with an explanation of facts and determination when concluding credit worthiness of the Veteran or excluding obligations of the non- purchasing spouse.
b. Verification of Alimony and Child Support
Obligations
The payment amount of any alimony and/or child support obligation of the borrower must be verified.
Do not request documentation of a borrower’s divorce unless it is necessary to verify the amount of any alimony or child support liability indicated by the borrower. If, however, in the routine course of processing the loan, the lender encounters direct evidence (such as,
Page 97
in the credit report) that a child support or alimony obligation exists, they should make any inquiries necessary to resolve discrepancies and obtain the appropriate verification. Spousal support may be treated as a reduction in income on VA Form 26-6393, Loan Analysis.
Child support payment is treated as a liability on VA Form 26-6393, Loan Analysis.
c. Analysis of Debts and Obligations
Significant debts and obligations include:
· debts and obligations with a remaining term of 10 months or more; that is, long-term obligations, and
· accounts with a term of less than 10 months that require payments so large as to cause a severe impact on the family’s resources for any period of time.
Example: Monthly payments of $300 on an auto loan or lease with a remaining balance of
$1,500, even though it should be paid out in 5 months, would be considered significant. The payment amount is so large as to cause a severe impact on the family’s resources during the first, most critical, months of the home loan. Determine whether debts and obligations which do not fit the description of “significant” should be given any weight in the analysis. They may have an impact on the borrower’s ability to provide for family living expenses.
If a married Veteran wants to obtain the loan in his or her name only, the Veteran may do so without regard to the spouse’s debts and obligations in a non-community property state.
However, in community property states, the spouse’s debts and obligations must be considered even if the Veteran wishes to obtain the loan in his or her name only. See Topic 2, subsection c of this chapter. Debts assigned to an ex-spouse by a divorce decree will not generally be charged against a borrower. This includes debts that are now delinquent.
d. Borrower as Co-obligor/Co-Signor on a Loan or
Obligation
The borrower(s) may have a contingent liability based on co-signing a loan. The lender may exclude the loan payments from the monthly obligations factored into the net effective income calculation in the loan analysis if:
· there is evidence that the loan payments are being made by someone else and the obligation is current, and
· there is not a reason to believe that the borrower will have to participate in repayment of the loan.
e. Pending Sale of Real Estate
A borrower(s) may have a current home and the sale of the real property is needed to complete the transaction. The lender may disregard the payments on the outstanding mortgage(s) and any consumer obligations which the Veteran intends to clear if available
Page 98
information provides a reasonable basis for concluding the equity to be realized from the sale will be sufficient for this purpose. See Topic 4, subsection c of this chapter for necessary documents.
f. Secondary Borrowing
If the borrower(s) plans to obtain a second mortgage simultaneously with the VA- guaranteed loan, include the second mortgage payment as a significant debt. From an underwriting standpoint, the Veteran must not be placed in a substantially worse position than if the entire amount borrowed had been guaranteed by VA. See Chapter 9 of this handbook for VA limitations on secondary borrowing. If the borrower(s) provides written evidence that the student loan debt will be deferred at least 12 months beyond the date of closing, a monthly payment does not need to be considered.
If a student loan is in repayment, or scheduled to begin within 12 months from the date of VA loan closing, the lender must consider the anticipated monthly obligation in the loan analysis and utilize the payment established by calculating each loan at a rate of five percent of the outstanding balance divided by 12 months.
Example: A borrower has a $25,000 student loan balance and you multiple it by 5%, which equals $1,250. This amount ($1,250) is divided by 12 months to equal a monthly payment of
$104.17.
If the payment(s) reported on the credit report for each student loan(s) is greater than the threshold payment calculation above in a above, the lender must use the payment recorded on the credit report. If the payment(s) reported on the credit report is less than the threshold payment calculation above, in order to count the lower payment, the loan file must contain a statement from the student loan servicer that reflects the actual loan terms and payment information for each student loan(s).
The statement(s) must be dated within 60 days of VA loan closing, and may be an electronic copy from the student loan servicer’s website or a printed statement provided by the student loan servicer.
It is the lender’s discretion as to whether the credit report should be supplemented with this information.
Loans Secured by Deposited Funds
Certain types of loans secured against deposited funds (signature loans, cash value life insurance policies, 401(k) loans, or other) in which repayment may be obtained through extinguishing the asset, do not require repayment consideration for loan qualification. The assets required to secure a loan(s) may not be included as an asset on the VA Form 26- 6393, Loan Analysis.
Use the current balance times 60 percent minus the loan balance to equal the usable amount to consider as an asset.
A statement would only be necessary to verify the amount used as an asset.
Page 99
h. Open 30-Day Charge Accounts
An open 30-day charge account is defined as an account in which the borrower(s) must pay off the outstanding balance on the account every month.
For open 30-day charge accounts, determine if the borrower(s) pays the balance in full each month, and has verified funds to cover the account balance in addition to any funds required for closing costs.
· If there are sufficient funds, the payment does not need to be included in Section D of the VA Form 26-6393, Loan Analysis, but the obligation should continue to be listed.
· If there are not sufficient funds, a minimum payment of 5 percent of the balance should be considered included in Section D of the VA Form 26-6393, Loan Analysis.