Why Do VA Loans Perform So Well?
VA mortgage loans have the highest performance rate of any loan program in existence today. This in spite of the fact that VA mortgages require zero down from the borrower. Many have blamed the notion of a no-down payment loan as a culprit in the housing debacle in the mid-2000s but VA loans have proved that wrong. And not just over the past 10 years but compared to any mortgage program over time. Why is that?
There are a few factors that VA loans have that other loans do not. One is a strict adherence the income to debt ratio. This ratio, expressed as a percentage, is calculated by dividing veterans’ monthly obligations by their gross monthly income.
If a veteran’s house payment, auto loan and credit cards add up to $2,000 and the gross monthly income is $5,000, the debt ratio is $2,000 divided by $5,000 = .40. The ratio is 40, below the maximum 41 ratio that VA lenders require.
Some borrowers are allowed to exceed, slightly, this ratio by evaluating other facets of the borrower’s profile such as an excellent credit history or showing the ability to handle a higher debt load in the past. Yet even when such exceptions are made, the exception is a minor one, allowing for a 43 ratio instead of a 41 for instance.
VA loans also evaluate not just the credit obligations of the veteran’s profile but also take into consideration the number of people living in the household and calculate how much money is left over at the end of each month. This amount, called residual income, must meet a minimum amount as determined by VA lending standards or the loan cannot be approved.
For example, in the northeast with two people living in the household, the minimum residual amount is $755. In the south with a family of five, the residual requirement is $1,039. This residual income requirement is unique to VA loans, and makes sure the veteran has not only enough to pay the bills, but some left over, too.