Residual income is a big one.

This is a unique credit and underwriting guideline that applies only to VA loans.

At the outset, it’s important to differentiate residual income from a debt-to-income ratio. Unlike conventional lenders, VA lenders are only concerned with the “back end” ratio, which considers total monthly debt and income. The DTI ratio standard for VA loans is currently 41 percent.

But DTI ratios take a back seat to residual income in the world of VA loans.

So what is residual income?

Essentially, it’s how much money is left over each month after borrowers cover major expenses, from housing and taxes to debt payments. That remainder is meant for things like groceries, health care, gas and all the other trappings of consumer and family life. The VA wants to ensure that a veteran has enough money left over to take care of regular household and family needs.

Prospective borrowers have to meet a specific residual income threshold, which varies depending on family size and geography. Here’s the VA’s table for residual income:

For example, an Ohio family of four must have at least $1,003 left over each month after paying their major obligations. The residual income levels are a bit higher in the Northeast and the West, each of which has a higher cost of living.

There’s also a direct link between residual income and debt-to-income ratios, one that’s geared toward protecting veterans from becoming financially overleveraged.

While DTI ratio and residual income are separate standards, they are connected in a key way: A prospective borrower whose DTI is greater than 41 percent has to meet a higher threshold when it comes to residual income. In those cases, the borrower’s residual income must exceed the regional requirement by at least 20 percent.

So, returning to the Ohio example, a family of four with a DTI above 41 percent would need a residual income of at least $1,203 in order to satisfy the VA.

Neither residual income nor a high DTI are supposed to automatically trigger loan approval or rejection. But prospective borrowers who can’t meet the residual income requirements will be hard-pressed to secure a VA loan.

And that’s actually a good thing. Standards like this are one of the main reasons VA loans have thrived in the face of foreclosure. It’s an additional layer of scrutiny and protection that helps ensure military borrowers have the ability to meet their financial obligations when it comes to buying a home.

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About the author: Chris Birk writes about real estate and the mortgage industry for a host of sites and publications, including Bigger Pockets, Mortgages Unzipped and Scotsman Guide. A former newspaper and magazine writer, he is also content director for a leading VA lender.

How VA’s Residual Income Factor Keeps Vets Out of Foreclosure is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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For example, a home will be “sold” for $100,000. The deal will be financing with a 95 percent loan-to-value mortgage. However, the seller will provide a $15,000 certificate of deposit to the buyer at closing.

On the surface, we have a deal with a $100,000 purchase price, $5,000 down, $95,000 in financing, and a $15,000 CD.

Alas, $100,000 was never paid for the house.

There was a “sales price” of $100,000, but then as part of the deal the seller provided a $15,000 rebate in the form of a CD. Since a CD is a certificate of deposit which presumably is worth $15,000 in this example, this property was sold at discount — the real price is $85,000.

This is a classic “cash plus” deal where the amount financed is greater than the price paid to the owner. The surplus is returned to the buyer at closing, if there was a closing.

Lenders will decline this transaction because the amount of financing sought is greater than the discounted value of the property. Even if this property appraises at $100,000, lenders will value the deal at the appraised value or the true sale price ($85,000), whichever is less.

Worse, if the lender is not told, in writing, in the loan application and in the sale agreement about the CD, there may well be grounds to consider charges involving fraud.

Bottom line: Should someone propose a cash-plus deal, sign nothing until you have spoken with an attorney.

What’s A Cash-Back Transaction? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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The “front” ratio is generally equal to your monthly costs for principal, interest, property taxes, and property insurance (what lenders call “PITI”). The “back” ratio includes the front ratio plus all regular monthly costs such as credit card payments and auto payments.

For example, Hall has a household income of $6,000 a month. With a conventional loan, a lender might allow ratios of “28/36.” The front ratio is “28.” This means 28 percent of Hall’s pre-tax income can be used for principal, interest, taxes, and insurance. In this case, 28 percent of $6,000 is $1,680 per month.

The back ratio is “36.” This means lender guidelines will allow Hall to devote 36 percent of $6,000, or $2,160 a month, to PITI plus regular monthly costs for items such as credit card debt, auto payments, etc.

Different programs use different front and back ratios: basic FHA loans are at 31/43 while VA ratios are more liberal at 41/41. Some ARM programs use 33/38 ratios.

Program ratios can be elastic. For instance, the use of energy efficient appliances and construction can help liberalize ratios, sometimes by 2 percent. This can be important for those trying to meet qualification standards.

In recent years, lender guidelines for many programs have become more liberal — meaning that more can be borrowed with a given income. For details, speak with lenders and real estate brokers.

What Are “Front” and “Back” Ratios? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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You will get a steady monthly income.

You won’t have to worry about the buyer qualifying for financing, or as much financing.

Tax obligations may be stretched out in certain cases — see a tax pro for details.

But, it could also happen that:

1. The buyer won’t make payments.

2. The buyer won’t put in much equity (or any equity), thereby increasing your risk.

3. The buyer will graciously provide the loan agreement papers, including “substitution” and “subordination” clauses that you won’t want.

4. The buyer will rent the place, not make payments, and simply flee. This is an extreme scenario.

5. The buyer will say there is hidden damage and refuse to make payments until the matter is resolved in court.

Bottom Line: If you are an owner do not agree to seller financing unless your attorney has first approved all terms and documents.

What are the pros and cons of owner financing? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Imagine that a home is worth $300,000 and has an assumable $100,000 mortgage. Instead of going to a lender, the seller “takes back” a note, secured by the property. For example, the seller might take-back a note for $270,000 if you will put up $30,000 in cash.

In other words, a seller take-back is a loan to a buyer from the owner.

A seller take-back is just like a loan from any lender. It must be repaid according to the terms and conditions outlined in the note. If not repaid, the property can be foreclosed.

The rules which apply generally to mortgages may not apply to seller take-backs. For example, some attorneys argue that a seller take-back is not subject to state usury rules (interest rate caps) because a seller take-back is NOT a loan — no money changed hands.

For details, have an attorney review take-back loan papers before signing anything. If you are a seller, insist on seeing a buyer’s credit report and past tax information — just like any lender. And be sure that any loan arrangement is written according to terms which are satisfactory to your attorney.

What’s a seller “take-back?” is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Please see an attorney who specializes in elder law for information regarding life estates, wills, and living wills as well as a tax professional.

My elderly parents want to sell us their house and then rent it back. Is this a good strategy? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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