Using the Basics to Determine a Borrower’s Ability to Repay the Mortgage

Written By: Stacey Sprain

You know, the more I’ve thought about things lately the more I have to admit I was wrong on one thing and I’m sure I’m not the only one in this category. For years we all frowned on having to do all of the extra processing and qualifying steps on VA loans. We all liked to gripe and complain about how VA was so far behind the times. Well look who is laughing at us all now, right? I hate to say it but take a look at the direction the rest of the agencies have gone in and are going in. Rather than behind the eight ball I have to say it’s looking more like VA has been five steps ahead of the game for years! Let’s take a look at a few things so you understand what I’m referring to.

1. Fannie and Freddie came out with HVCC to ensure appraiser independence. VA already had this in place for years by requiring appraiser assignment through their appraiser panel.

2. FHA re-affirmed what they state was in place for years but was never enforced when they came out with FHA appraiser independence requirements. VA had this in place for years.

3. VA has always required an assessment of qualifying based on residual income; meaning the income that remains after federal and state taxes, social security and Medicare, property maintenance and utilities, daycare expenses, and all financial obligations have been subtracted from gross earnings. We always had to refer to a number of charts to calculate residual income and make sure it was acceptable for the loan situation in question. Now this method of evaluating a borrower’s ability to repay the loan is becoming more and more of an un-written trend with the big lenders and agencies in how they determine the creditworthiness of the loan file. And when you stand back to think about, it really makes the most sense doesn’t it?

This will be the year that goes down in history as one of the most challenging for our business and there will be two key phrases that will be ever-etched in our brains as a result of it; “Borrower’s Ability to Repay the Mortgage” and “Fannie Mae Loan Quality Initiative.” I’ll save my overview of LQI for next week because quite frankly, I need to calm down before I blurt out my opinions and make enemies at the agency level. Don’t even get me started on that topic!

But in regards to “Borrower’s Ability to Repay the Mortgage”- This is where we can all take some direction from what VA has been requiring for as long as I can remember. The most sensible way to battle for a challenging loan is to take a serious and hard look at the borrower’s income, subtract the standard debts and liabilities but in addition, be as sensible as to scale down the earnings to show hard proof of what that borrower has left to live on each month.

Here is how VA instructs we derive a residual income figure when evaluating the loan:

From gross earnings

• Determine and subtract the appropriate deductions for Federal income tax and Social Security using the “Employer’s Tax Guide,” Circular E, issued by the Internal Revenue Service.

• Determine the appropriate deductions for state and local taxes using similar materials provided by the states.

• Subtract the borrower’s verified monthly debts and obligations (from credit report and/or other sources)

• Subtract obligations for child support and spousal maintenance

• Subtract monthly child care expenses

• Subtract a calculation that represents the monthly maintenance and utility expense for the subject property. (Calculation = Square footage x .14)

• Subtract the proposed PITI and any monthly association dues

• What remains is considered the residual income.

The following figures represent what are considered to be acceptable minimums for residual income based on the loan amount, family size and area of the country.

Northeast- Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania
Rhode Island, Vermont.

For loan amounts of $79999 and below
1 - $390
2 - $654
3 - $788
4 - $888
5 - $921
over 5 – add $75 for each addition family member

For loan amounts $80,000 and above
1 - $450
2 - $755
3 - $909
4 - $1,025
5 - $1062
over 5 – add $80 for each addition family member

Midwest- Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota,
Ohio, South Dakota, Wisconsin

For loan amounts of $79999 and below
1 - $382
2 - $641
3 - $772
4 - $868
5 - $902
over 5 – add $75 for each addition family member

For loan amounts $80,000 and above
1 - $441
2 - $738
3 - $889
4 - $1,033
5 - $1,039
over 5 – add $80 for each addition family member

South- Alabama, Arkansas, Delaware, District of Columbia, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, Oklahoma, Puerto Rico, South Carolina, Tennessee, Texas, Virginia, West Virginia

For loan amounts of $79999 and below
1 - $382
2 - $641
3 - $772
4 - $868
5 - $902
over 5 – add $75 for each addition family member

For loan amounts $80,000 and above
1 - $441
2 - $738
3 - $889
4 - $1,033
5 - $1,039
over 5 – add $80 for each addition family member

West- Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana, Nevada, New Mexico, Oregon, Utah,
Washington, Wyoming.

For loan amounts of $79999 and below
1 - $425
2 - $713
3 - $859
4 - $967
5 - $1,004
over 5 – add $75 for each addition family member

For loan amounts $80,000 and above
1 - $491
2 - $823
3 - $990
4 - $1,117
5 - $1,158
over 5 – add $80 for each addition family member

Try utilizing these calculations on all of your loan files and you’ll learn how to use these figures to your benefit for situations when you must battle with an underwriter for approval on a loan. However, in the reverse situation, use these figures to determine those situations where you may need every compensating factor you can get your hands on in order to make the loan work.

The bottom line is that the borrower’s true ability to repay the mortgage shouldn’t be based simply by using gross income minus only those expenses reported on credit reports and in divorce settlement documents. It is much more conservative yet realistic to subtract all of the true estimated expenses that the borrower will be accountable for after the loan closes and see what’s left over for “living!”


About The Author

Stacey Sprain - As an NAMP® staff writer, Ms. Stacey Sprain is currently a NAMP® member in good standing, and is a NAMP® Certified Ambassador Loan Processor (NAMP®-CALP). With over 15+ years of mortgage banking experience, Stacey is also a Quality Control Manager for a major mortgage lending institution. If you would like to become a volunteer writer for us, please email us at: contact@mortgageprocessor.org.


Opinion-Editorial (Op-Ed) Disclaimer For NAMU® Library Articles: The views and opinions expressed in the NAMU® Library articles are those of the authors and do not necessarily reflect any official NAMU® policy or position. Examples of analysis performed within this article are only examples. They should not be utilized in real-world application as they are based only on very limited and dated open source information. Assumptions made within the analysis are not reflective of the position of NAMU®. Nothing contained in this articles should be considered legal advice.