VA loans Front/Back End Ratios (insurance, loan, interest rate, real estate)

[SLCPUNK]

I am reading conflicting information online about front/back end ratios on VA loans. I'm trying to figure out how much home we can qualify for and need an accurate ratio to get an idea . Can somebody explain to me how these loans are calculated?

We have no debt other than student loans and credit score is almost 800.

Thanks.

[SmartMoney]

VA uses two methods. The first is single ratio, which is a guideline of 41% for all monthly debt. (no such thing as front ratio in VA, although almost every lenders' computers default with two ratios, anyway).

The second method is the residual calculation. VA takes the vet's (and family) total gross monthly income, subtracts out Federal, State and SS taxes, including Medicare. Then subtracts all monthly debt, the total housing payment, estimated utilities and maintenance. That remaining number is his residual. Every area of the country has it's own required residual, depending upon family size.

Now, the 41% ratio can be exceeded provided the borrower has 125% of the required residual. Most investors we see today don't like to cross the 50% ratio for all debt, and then anything over 45% typically requires compensating factors (money in the bank, income not counted and so on). You can google "va required residual income" and find these figures quite easily.

[SLCPUNK]

Thanks, that's very helpful and puts me at ease understanding how they calculate it.

[Mickey3]

Is the 41% true of a VA loan through any lender? My family is considering a new home and there are incentives tied to using their lender (we've done our homework and the other numbers involved are reasonable in the current market) so I am curious if every lender follows the 41% back end guideline for VA loans.

And if we are slightly over the 41% mark do they end up using the residual rule as a "golden rule" because we're fine with the 125% of the required residual and are sitting right around the 41% mark based on the larger price/lot of the two we are considering.

I am particularly confused and concerned because given the 41% back end ratio we are fine, but almost NO online calculators are supporting that - is it just because the online calculators are not adjusting for the 41% back end ratio?
Thanks for any help or clarification anyone can provide.

[SmartMoney]

Very few online calculators are geared to VA loans, but the calculation is really quite simple. FWIW, rarely do we seen anyone right at 41%......unless they have prior credit issues or other challenges. For most buyers, the following can be used:

Gross Monthly Income x .44% = max mortage payment and all monthly debts.

From that number, subtract all montly obligations (loans, credit cards, child support) which = max available for PITI

From that number, subtract your estimated real estate taxes, hazard insurance, and HOA, which = max available for P&I

Take that number and divide it by the factor for the current interest rate. You can use anyone's mortgage factor tables, I happen to like this chart when away from my desk: Amortization Chart

So, let's say by the time you did the math, you were left with $1100. Look at the chart and find the factor for 3.25% for a 30 year loan (4.631). The factor is per 1000, so I skip a step and convert it to .004631). Take the 1100 and divide by .004631 (or you could divide by 4.631 and take the answer and multilply it by 1000.). Your answer is 237K (and change). That loan amount includes your funding fee, so depending on what yours is, you may have to multiply that loan amount by 96.6% (if you are a 2nd time user) or 97.85% for a first time user.

[Mickey3]

Those numbers looked confusing at first glance, but you broke it down perfectly! Thank you! It reinforced that what we thought we could afford was accurate... not overshooting by $100K! Which is a big deal here in California, at least Going in to get pre-approved with recommended lender ($10K in incentives attached, but are going to be super careful about the rates) on Tuesday.