We are trying to put some parameters around factors that we are allowed, by regulation, to consider in determining ATR, such as other assets and residual income. We are having trouble with residual income. How do you determine how much is enough? I know there are government programs that have guidelines so is that what we use?

The advice that we were given at compliance training was to use the VA guidance. It can be found on page 48 of their training guide. (There are a lot of training guides available for different locations, this one appears to be the most recent.) http://www.benefits.va.gov/stpaul/images/TrainingGuide2014.pdf

Are you going to require your lenders to consider residual income? We are discussing that right now, as the rule states that you must consider DTI or residual income and we have exclusively calculated DTI in the past.

We are planning to use the residual income calculation in conjunction with DTI when the DTI is above a set ratio. Thanks for your response.

We will also be using residual income on loans where the DTI exceeds 43% (for portfolio) or 45% on agency. Our loan system offers the VA analysis, but this is not very friendly for non-VA loans. We will make due with it, but are developing our own version of the VA analysis and a resulting residual income form. Our investors are asking for it, but do not provide a sample of what they are looking for.

Has anyone addressed this form issue?

Can anyone comment on how far into the VA calucations you have considered. Looking at the VA form to calculate, we will need to know number of folks in household and also if there is other income in the household and be able to show that we are not counting a member of the household if they have income to support themselves. Thoughts?

Sounding like we will need to become V.A. lending experts also.

You do not need to become VA experts to use residual income. We use it as a guide only, as we may not use the VA residual income amounts. We are using an amount based a 2 person family and then an amount on each family member in addition. You may establish how and what income you are going to establish the residual income for your operation. As long as you set the formula and be consistent with it use, you should not have a problem. It needs to be based on fair amount that is not designed to exclude anyone or any group, per fair lending guides.

I made up my own form. It is based on the VA calculations but you need to gather two things that you wont know unless you ask the borrower which are:

1. How many ppl are dependent on the income used for this loan (household dependents including borr and coborr)
2. Do you have any childcare costs and what are they monthly.

The VA takes these things into consideration as well as home utiliites which they base at .14 x square footage each month.

other than these debts, the rest is your total nut PITI plus liabilites (plus util and childcare) subtracted from your total montly income, the remainder is residual.

ClareB HUD just came out with their residual income calculation, which now mirrors VA, so I would adopt those. The only thing I may look at is the residual per person, as in some areas it may be low. Your institution can change those numbers in the chart to fit your area, without cause a problem, as long as you are consistent with their use.

Another way of looking at residual income is using the "back end" or PITI housing ratio. We have started incorporating a 30% maximum housing ratio into our underwriting. We think it addresses the same question of "Is the mtg debt too much, regardless of DTI?".

Sorry, should be "front end" ratio.