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
