VA loans are different than other types of mortgages, especially when considering the fact that they offer 100% financing. While the VA does not actually make loans, they do guarantee lenders that, in the event of a borrower’s default, the losses will be covered. Keeping this in mind, VA loan underwriting is somewhat different from other types of mortgage underwriting and leads many people to question what are shelter expenses and the connection to residual income?
What Are Shelter Expenses?
Owning a home involves more expenses than just the mortgage payment. In order to make sure that a VA borrower can actually afford the home, VA loans take into consideration shelter expenses which are basically an estimate of the cost of living in the home. These shelter expenses are considered for the approval of the loan in order to produce a more accurate financial picture of what owning and running the home will be for the borrower.
Calculating Shelter Expenses
Shelter Expenses are considered maintenance and utility costs on a VA loan. It is a simple calculation as follows:
14 cents per square footage of home as taken from the appraisal (includes home and garage)
For example – If the total square footage is 1,500 square feet, the monthly shelter expense equals $225.
Residual income is the amount of funds remaining after the borrower has made the monthly debt payments which include the mortgage payment, taxes, insurance, other loans, car payments and any debt obligations that may exist. However, for a VA loan, shelter expenses are also added to the debt in order to determine the residual income for family living expenses, such as food, clothing, travel, etc. VA loan guidelines require that borrowers at least meet the minimum residual income standard which depends on the location of the property and the size of the family.
Debt to Income Ratio Vs. Residual Income
VA loans are unique because if a borrower’s debt to income ratio exceeds the maximum allowed, the borrower is not automatically declined for the loan. In this scenario, 120% of the residual income will be required to still qualify. If debt to income ratios are 41% or less, the maximum residual is allowed.
In so many ways, VA loans are special and offer eligible borrowers many benefits, as well as, ways to make the dream of homeownership a reality. However, VA loans go one step further because, from the onset, it is their goal to keep borrowers in their homes for the long term. This is the reason that VA loanshave an outstanding record for a minimum of defaults.
Feel free at any time to contact us for more information about calculating shelter expenses, residual income and how much you can borrow anywhere across the country.
My loan process was very easy and quick. Not to mention a great loan rate. I couldn't be happier!
Capt Sam T. - US Army
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