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.

___________________________________

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

Technorati Tags: back, back end, conventional, debt-to-income, front, front end, income, loan, mortgage, qualify, ratio, residual, VA

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

Technorati Tags: back, debts, front, income, mortgage, qualifying, ratios