When a VA or FHA purchase file lands on an underwriter's desk, the first question is not "will this borrower qualify?" It is "does this file make sense?" Underwriters are trained to look for inconsistencies, gaps, and risks before they evaluate anything else.
Understanding that mindset can help borrowers and loan officers avoid delays caused by preventable mistakes. Underwriting for both programs comes down to four areas:
- Eligibility and entitlement
- Income and stability
- Credit and liability
- The property itself
What Underwriting Is
Underwriting is the final risk assessment before a loan closes. For VA and FHA loans, that assessment has to satisfy both the lender making the loan and the government agency backing it. The VA guarantees a portion of each approved loan against default, while the FHA insures the full loan through its mortgage insurance program. Both agencies publish guidelines that lenders must follow, and underwriters are the people responsible for confirming that every file meets those standards before money changes hands.
Most purchase files today go through an Automated Underwriting System (AUS) first. Lenders typically run VA files through Desktop Underwriter or Loan Product Advisor, while FHA files go through FHA's TOTAL Mortgage Scorecard. When the system returns an "Approve/Eligible" finding, many documentation requirements are streamlined. When the system returns a "Refer," a human underwriter reviews the file manually, which involves stricter documentation standards and a more detailed analysis of risk factors.
According to 2024 Home Mortgage Disclosure Act (HMDA) data, only 11.26% of VA loan applications were denied compared to 16.71% of FHA applications and 20.19% of conventional loans.
VA Purchase Files: What the Underwriter Checks First
Entitlement and the Certificate of Eligibility
The first thing a VA underwriter confirms is that the borrower is actually eligible to use the benefit. That means verifying the Certificate of Eligibility (COE) and confirming the entitlement status shown on it. If the borrower has used a VA loan before, the underwriter will check whether entitlement was restored, whether a prior VA loan is still active, and whether partial entitlement applies. Any discrepancy between the COE and the loan application, such as a name mismatch or an entitlement amount that does not support the transaction, stops the file until it is resolved.
Veterans should confirm their eligibility and entitlement status before going under contract, not after. Corrections to service records or entitlement status can take time, and that time typically comes out of a purchase contract's closing window.
Income: Stability Over Amount
The VA does not set a minimum income requirement. What it does require is that income be stable, verifiable, and reasonably expected to continue. Underwriters apply that standard to every income source in the file. Two years of employment history in the same field is the benchmark for most borrowers. Gaps in employment, recent job changes, or income that has fluctuated significantly will require explanation and documentation.
Military-specific income types, including Basic Allowance for Housing (BAH), Basic Allowance for Subsistence (BAS), and VA disability compensation, all count toward qualifying income when properly documented. Non-taxable income like VA disability can also be grossed up for debt-to-income (DTI) calculation purposes, which effectively increases the borrower's qualifying income. Self-employed Veterans typically need two full years of tax returns and a year-to-date profit and loss statement before that income can be used.
The Residual Income Calculation
Residual income is the feature of VA underwriting that has no equivalent in FHA or conventional programs, and it is often the variable that determines whether a borderline file gets approved. After accounting for the projected mortgage payment, taxes, and all recurring monthly debts, the borrower must have a minimum amount left over each month. The VA sets those minimums by region and family size, published in Chapter 4 of VA Pamphlet 26-7, the official VA Lender's Handbook.
The VA divides the country into four regions: Northeast, Midwest, South, and West. Required residual income is higher for larger families and higher loan amounts. When a borrower's DTI exceeds 41%, the VA requires residual income to exceed the regional minimum by at least 20% before an underwriter can issue an approval without additional scrutiny. A borrower might pass the DTI threshold and still face conditions if their residual income is too close to the floor.
Credit History and Liability Review
The VA does not set a minimum credit score. Lenders commonly require scores in the range of 580 to 620, with stronger pricing available at higher scores. What the underwriter actually reads, though, is the credit report itself, not just the number. They are looking at the pattern of payment behavior over 12 to 24 months, any open collections or judgments, and whether the borrower has addressed past derogatory items or simply let them sit.
Every liability on the credit report is accounted for in the DTI calculation. The underwriter will also look for new accounts opened after the application date, since any new debt changes the qualifying ratios and can require the file to be re-run through AUS.
FHA Purchase Files: What the Underwriter Checks First
Borrower Eligibility and the Decision Credit Score
FHA does not have a service-based eligibility requirement, but the underwriter still verifies that the borrower meets the program's baseline qualifications under HUD Handbook 4000.1, the authoritative policy document for FHA lending. That starts with the decision credit score, which FHA determines using a specific rule: when all three bureaus report a score, the middle value is used. When only two are available, the lower of the two applies. The score determines the minimum down payment tier: 3.5% for scores of 580 or above, and 10% for scores between 500 and 579.
Income Documentation and DTI
FHA underwriters work through income methodically, looking for stability and continuity. Standard documentation includes 30 days of pay stubs, two years of W-2s, and two years of personal tax returns. Self-employed borrowers typically need two years of business returns along with a year-to-date profit and loss statement. Variable income sources, including overtime, bonuses, and commission, generally require a two-year history before they can be counted, and an underwriter will average them rather than use the most recent figure.
FHA uses DTI as a hard qualification metric in a way the VA does not. Files with DTI above 43% typically require manual underwriting under HUD's 2025 policy updates. In manual underwriting, maximum DTI is capped at 40% front-end and 50% back-end for borrowers with credit scores below 580, with compensating factors required to justify higher ratios above those thresholds. Compensating factors include documented cash reserves, a history of successful housing payment at or above the proposed mortgage amount, and minimal debt increase compared to current obligations.
Assets: Source and Seasoning
Underwriters do not just confirm that a borrower has enough money to close. They verify that the money comes from an acceptable source and has been in the borrower's account long enough to be considered legitimate. Bank statements covering 60 days are standard. Any deposit representing more than 50% of the borrower's gross monthly income must be explained and sourced.
Gift funds are allowed for FHA loans and must follow specific documentation requirements: a signed gift letter confirming no repayment is expected, evidence of the donor's ability to give, and confirmation that the funds have been transferred and deposited. Cash gifts handed over without a verifiable paper trail are not acceptable.
Property Review
For both VA and FHA files, the underwriter reviews the appraisal as a separate layer from the borrower review. On the VA side, the appraisal must confirm that the property meets Minimum Property Requirements and that the value supports the purchase price. On the FHA side, the same dual standard applies under HUD's property acceptability criteria, which require the home to be safe, sound, and secure.
A low appraisal or an appraiser-noted condition issue generates an underwriting condition that must be cleared before the file can receive a Clear to Close. Property conditions are non-negotiable: the underwriter cannot approve around them.
What Underwriters Flag Most Often
Across both programs, several issues generate the most conditions and cause the most delays.
Unexplained deposits. Large bank deposits without documentation create an automatic condition. Every dollar used for closing must be traceable.
Inconsistent employment history. Gaps, recent job changes, and income that does not align with prior tax returns all require letters of explanation and supporting documents.
Collections and disputed accounts. Open collections totaling $1,000 or more will typically trigger a manual downgrade on an FHA file. On VA files, the underwriter evaluates collection accounts as part of the overall credit profile.
Occupancy conflicts. Both programs require owner-occupancy as the primary residence. Any indication in the file that the borrower does not intend to live in the home can result in a denial.
AUS findings that do not match the documentation. If the income entered to run AUS differs from what the documents actually support, the underwriter will condition the file and may require a re-run.
How to Submit a Stronger File
The borrowers who move through underwriting fastest are the ones who submit complete, consistent, and well-organized files from the start. That means every page of every bank statement, explanations written and ready before the underwriter asks, and income documentation that tells a clear and continuous story.
For VA borrowers, confirming entitlement early and calculating residual income before going under contract removes the two most common VA-specific obstacles. For FHA borrowers, sourcing down payment funds early and keeping liabilities stable from application through closing eliminates the majority of conditions underwriters issue.
"Quality underwriting practices ensure that, despite fierce competition, lenders are competing on price and service, not loose underwriting, as some did before the financial crisis." - Bob Broeksmit
Explore more articles on VA loan benefits, the homebuying process, and financial guidance built for Veterans at the NewDay USA Learning Center.
FAQs
What is the difference between automated and manual underwriting?
Automated underwriting uses a computer system to evaluate the loan file against program guidelines and return a decision in minutes. Manual underwriting is a human review, typically required when the AUS returns a "Refer" finding or when the borrower has specific credit events, such as a recent bankruptcy or foreclosure. Manual underwriting is generally more thorough, requires more documentation, and applies stricter DTI benchmarks.
Does the VA have a minimum credit score for underwriting?
The VA does not publish a minimum credit score. Lenders set their own overlays, commonly in the 580 to 620 range. The underwriter's credit analysis focuses on payment history and behavioral patterns over the prior 24 months, not just the number itself.
What is residual income, and why does it matter so much for VA files?
Residual income is the money left over each month after the mortgage payment, taxes, and all recurring debts are subtracted from gross income. The VA sets minimum thresholds by region and family size. A file can have an acceptable DTI and still receive conditions or a denial if residual income falls below the regional floor. It is one of the most important qualifying factors specific to VA loans.
What causes a VA or FHA file to be downgraded to manual underwriting?
Common triggers include:
- An AUS "Refer" result
- Disputed derogatory accounts above $1,000 on an FHA file
- A recent bankruptcy or foreclosure within the applicable waiting period
- Multiple late payments in the last 12 to 24 months
- Income that cannot be verified through standard documentation
Any of these conditions pushes the file to a human underwriter for full review.
How long does underwriting typically take on a VA or FHA purchase?
A clean file with an AUS approval can move through underwriting in a few business days. Manual underwriting typically takes longer, often one to three weeks, depending on how quickly conditions are cleared.
