VA Home Loans in San Diego: Residual Income Analysis

Underwriters look at three things:

READ: The Three C's Of Underwriting Approvals

Credit Reputation

• Credit Score
• Foreclosures, bankruptcies, liens and/or judgments
• Mortgage delinquencies
• Credit delinquencies, repossessions, collections, or charge-offs
• Credit accounts: type, age, limits, usage and status of revolving accounts
• Borrower's request for new credit in last 12 months

There is not a minimum credit score requirement, for VA Home Loans but a two-year good payment history is required. A late payment on a credit card shouldn't hurt you but a pattern of late payments, in the past 24 months, might.

Capacity

• Debt ratios: Qualifying monthly housing expense-to-income ratio or monthly debt payment-to-income ratio
• Salaried versus self-employed borrower
• Cash reserves
• Number of borrowers
• Loan Characteristics:
  • Product: a 15 or 30 year fixed rate, , an adjustable rate mortgages,
  • Purpose of Loan: purchase or refinance (cash-out or no cash-out)

The VA also uses residual income analysis for determining "capacity". From the VA website:

The primary method of evaluating a veteran's income is the residual income method. Under this method, the underwriter determines that a veteran has sufficient income to cover day-to-day living expenses after paying housing expenses, taxes, and other debts such as car payments and credit card payments.

For example, if an 0-2 (with three years service) were receiving a base pay of $3484, a BAH of $2000 and BAS of $300, her total monthly income would be $5784. We would deduct her taxes (on the base pay), of about $800. She's single, without dependents so there are no childcare expenses. This gives her contributory income of $5084. If she had $1200 in monthly expenses (credit cards, car loans, etc), her contributory income is reduced to $3884. The VA requires a residual income of $491. In order to "trump" the debt-to-income ratio analysis, we would need residual income of 120% of that, or about $600; this would allow for a maximum housing expense of $3,200.

Using the "eight dollars per thousand" estimate, Lt (jg) Smith would be approved for a $400,000 VA home loan.

Collateral

• Borrower's total equity or down payment
• Property type: a 1-unit or 2- to 4- unit detached property, Condominium Unit or Manufactured Home
• Property use: Primary Residence Only

No down payment is required for a VA Home Loan because the VA insures 25% of the balance for the lender. The VA charges the veteran a funding fee, which is added to the loan, to pay for that insurance. Why does the VA charge a funding fee?

How much is the funding fee?

Determining your monthly mortgage payment is based upon three components:

1- Principal and Interest- this is the amount needed to service the debt and retire the loan.You can determine that amount by using this calulator. In Lt (jg) Smith's example, a $400,000 mortgage, for 30 years, at 5.25% would have a principal and interest payment of $2208.

2- Property Taxes- In California, we estimate 1.25% of the purchase price, for property taxes. In Lt.(jg) Smith's example, The annual amount would be $5000 or $416 monthly.

3- Property Insurance- For single family homes, we would use the actual hazard insurance premium. That would be about $65/month. For condominiums, we would use the amount of the association fee because it includes the hazard insurance. Let's assume that the amount is $300 monthly

Lt (jg) Smith's housing expense, then, would be $2,916, well under the "eight bucks per thousand" guesstimate. She has monthly income of $5784 and expected monthly debts of $4116. She would fail the debt-to-income ratio test but be approved based upon the residual income analysis.

Brian Brady is considered to be San Diego's VA loan expert and can be reached at 858-777-9751