VA home loans are becoming quite popular these days as loan production in 2013 was at record levels (over 629,000 loans) and production in 2014 is expected to be near 800,000 loans. During this same time frame, FHA’s market share has greatly decreased primarily due to their high Mortgage Insurance Premiums.
Also, despite the fact that a large majority of VA home loan purchases (reportedly as high as 89%) involve borrowers making no down payment, the delinquency rates on VA loans have traditionally been lower than on FHA mortgages – although FHA requires at least a 3.5% minimum investment.
One big reason for the low delinquency rates is arguably the VA’s additional housing affordability test. Instead of relying solely on a DTI guideline, VA’s “Residual Income Test” looks at the amount of funds remaining from a borrower’s net effective income after deducting for monthly payment of debts, the PITI for the subject property, maintenance & utilities, HOA & condo fees, etc. This approach appears to be a better way to assess a borrower’s ability to meet all of their obligations on a monthly basis.
As more lenders are contemplating whether or not to originate Non-Qualified Mortgages, one of the key questions is how to document a Non-QM borrower’s Ability to Repay (ATR). Some lenders may decide that the VA’s Residual Income Test is a proven way to document compliance with the ATR requirement. It is also interesting to note that FHA even adopted the VA’s Residual Income Test as an official compensating factor that a lender can utilize to qualify a borrower with higher ratio on a manually underwritten loan transaction.
The bottom line is that underwriters should become very familiar with VA’s Residual Income Test as it will be performed on more transactions (VA loans, FHA manually underwritten loans and many Non-QM loans) in the future.
Is it a better way to qualify a prospective borrower – you decide!