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VA Home Loans in San Diego: Residual Income Analysis

By
Commercial Real Estate Agent with Matthews Capital Markets NMLS 2415712

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?

The VA funding fee is required by law. The fee is intended to enable the veteran who obtains a VA home loan to contribute toward the cost of this benefit, and thereby reduce the cost to taxpayers. The funding fee for second time users who do not make a down payment is slightly higher. The idea of a higher fee for second time use is based on the fact that these veterans have already had a chance to use the benefit once, and also that prior users have had time to accumulate equity or save money towards a down payment. Second time users who make a down payment of at least 5 percent pay a reduced funding fee of 1.5 percent, the same as first time users making the same down payment. For a 10 percent down payment, the fee drops to 1.25 percent.

How much is the funding fee?

The effect of the funding fee on a veteran's financial situation is minimized since the fee may be financed in the loan. National Guard and Reservist veterans pay a slightly higher funding fee percentage. To determine the exact funding fee percentage, please review the funding fee table.

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

Comments (8)

Barbara S. Duncan
RE/MAX Advantage - Searcy, AR
GRI, e-PRO, Executive Broker, Searcy AR

Your property tax is probably more than a lot of our Arkansas people make!!  We could make a house payment with that $416.  But Calif is beautiful and I loved living there.

Apr 11, 2009 10:28 AM
Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

Love VA loans.  I'm closing one on the 29th.  All done and ready to go.  Appraisal came in $5000 over contract.  Things are changing for the better for VA loans. 

Gotta say, that funding fee for the second use is a pretty big hit.  3.3% is a lot of money.  I don't see a purpose for this penalty.

 

Apr 11, 2009 10:44 AM
Charles Stallions
Charles Stallions Real Estate Services - Pensacola, FL
850-476-4494 - Pensacola, Pace or Gulf Breeze, Fl.

Hi Brian just wanted to pop-in and say hi again and also that I enjoy the VA as well. Been doing them for as while and it is  great oppurtunity to thank those who serve.

Apr 11, 2009 12:05 PM
William Johnson
Retired - La Jolla, CA
Retired

Hi Brian, The guidelines as you have set the forth as so well organized and nicely presented, I am going to print this and keep it handy. So well done. My compliments Sir!

Apr 11, 2009 01:52 PM
Ann Heitland
Retired from RE/MAX Peak Properties - Flagstaff, AZ
Retired from Flagstaff Real Estate Sales

That residual income out may be why so many VAs have ended in foreclosure -- actually, I think there are more complicated reasons, but it didn't help. Thanks for the guideline info tho!

Apr 12, 2009 02:09 PM
Brian Brady
Matthews Capital Markets - Tampa, FL
858-699-4590

Hi Ann,

I thinkyu'e confusing the fact that loan defaults from military members is high because they were targeted by predatory REALTORS and lenders to AVOID the VA loan.

VA foreclosures, while rising along with the rest of the country, are far below their "cousins" at HUD.  Residual income anlysis is quite pragmatic and is hard to "game"

Apr 14, 2009 12:30 PM
Brian Brady
Matthews Capital Markets - Tampa, FL
858-699-4590

3.3% is a lot of money.  I don't see a purpose for this penalty.

Penalty, Lenn?  I love how you frame things.  Let me see if I can explain it (as was explained to me, years ago, by the good folks at VA).  When you read what I'm about to say, your term "penalty" makes sense but I think you'll understand the VA's reasoning better.

The "financial life cycle of the veteran" is designed to help him/her build wealth through real estate.  Inasmuch, they desiggn the home loan program to match with the vet's life cycle.  The reasoning is thatthe vet will have no money to buy his/her first home so the funding fee is 2.15%.

The "idea" is that the vet will build up equity from loan amortization and appreciation, to use for a down payment on a larger home, years later.  Accordingly, they only charge a funding fee of 1.5% for a 5% down payment or 1.25% for a 10% down payment.  They "penalize" the second-time user by charging the higher funding fee for a 100% loan.

The VA assumes that the vet will "parlay" his/her equity when buying new homes.  This real estate decline was probably never expected when they crafted the funding fee schedule.  If anything, I expect them to raise the second-time funding fee hgher and lower the 95% and 90% loan option funding fees.

Apr 14, 2009 12:38 PM
Susan Zanzonico
Berkshire Hathaway Home Services - Morristown, NJ
Sellers/Buyers Agent, Morristown NJ Real Estate

Hi Brian, Useful guidelines and interesting on the taxes.  In Morristown they could easily be $7-8K..Yikes..maybe I should move to SD!

May 09, 2009 02:09 AM