Key takeaways
- VA residual income requirements are in place to help reduce the risk of foreclosure, which is very common with other zero-down loan options.
- Residual income requirements vary based on family size and the cost of living in your geographical location, as well as the total purchase price of the home.
- Exceeding the minimum residual income requirements by 20% or more is often enough to override high DTI.
What is residual income?
Residual income is the amount of money a borrower has remaining each month after all fixed expenses, such as a mortgage, personal loans, car loans, utilities, and other household expenses, have been paid. The Department of Veterans Affairs evaluates this income to determine if a borrower has enough money remaining to take care of day-to-day costs that can occur throughout the month.
Because VA loans do not require a down payment, they have a higher loan-to-value ratio (LTV), which generally has higher foreclosure rates. They require a specific residual income based on family size and geographical cost of living to help keep their foreclosure rates down.
What is included in residual income?
Residual income is the money left over after all your monthly obligations have been met. This residual income is money that can be used for day-to-day purchases, such as groceries, gas for the car, and new clothes. It can also be used for things like investments, savings, or even a vacation fund.
Benefits of residual income
As we mentioned before, loans that offer a zero-down option create a high LTV ratio, putting them at a higher risk of foreclosure. By evaluating residual income, lenders can determine whether the borrower has enough income each month to cover all monthly expenses as well as day-to-day expenses. Putting residual income requirements in place helps to ensure borrowers can afford their new home, thus reducing the risk of foreclosure.
Can you use residual income on a VA loan?
If you are considering a VA loan, the role of residual income and meeting the guidelines are just as important, if not more, than your debt-to-income ratio. The idea behind looking at residual income is to ensure that the borrower can cover all their expenses, including regular monthly obligations, such as mortgage payments and other loans, as well as day-to-day expenses, such as feeding the family and putting gas in the car.
Residual income and DTI ratio
When applying for a VA loan, lenders look for a DTI below 41% and that the borrower meets the minimum residual income requirement for their location, family size, and loan amount. However, if your DTI exceeds 41% but your residual income is more than 120% above the minimum requirement, it is considered a major compensating factor that could be enough to approve the mortgage despite the higher DTI percentage.
How does the VA calculate residual income?
In order to determine residual income, also known as discretionary income, you combine all your monthly debt payments and subtract them from your gross monthly income. This includes items such as car payments, student loans, credit card debt, child care, child support, alimony payments, a monthly mortgage payment, and estimated utilities for the month. Once subtracted, the remaining amount is considered your residual income. This residual income is what is typically used for things like groceries, gas, new clothing, and more.
The VA has created residual income charts that take into consideration your family size, the cost of living in your geographic region, and the loan amount of your mortgage.
VA Residual Income Charts
Residual income charts for VA loan amounts above $80,000
| Family Size | Northeast | Midwest | South | West |
|---|---|---|---|---|
| 1 | $450 | $441 | $441 | $491 |
| 2 | $755 | $738 | $738 | $823 |
| 3 | $909 | $889 | $889 | $990 |
| 4 | $1,025 | $1,003 | $1,003 | $1,117 |
| 5 | $1,062 | $1,039 | $1,039 | $1,158 |
| More than 5 | Add $80 per additional family member up to seven | Add $80 per additional family member up to seven | Add $80 per additional family member up to seven | Add $80 per additional family member up to seven |
Residual income charts for VA loan amounts below $80,000
| Family Size | Northeast | Midwest | South | West |
|---|---|---|---|---|
| 1 | $390 | $382 | $382 | $425 |
| 2 | $654 | $641 | $641 | $713 |
| 3 | $788 | $772 | $772 | $859 |
| 4 | $888 | $868 | $868 | $967 |
| 5 | $921 | $902 | $902 | $1,004 |
| More than 5 | Add $75 per additional family member up to seven | Add $75 per additional family member up to seven | Add $75 per additional family member up to seven | Add $75 per additional family member up to seven |
Can you be denied due to low residual income?
If your residual income does not meet the requirements for your family size and geographical location, it can affect your eligibility for a VA home loan. However, the VA minimum residual income guidelines are simply guidelines and are not the only factor that mortgage lenders typically consider. By looking at your complete loan file, lenders may find compensating factors, such as a large savings account that provides at least six months of cash reserves, that they consider enough to override a lower residual income.
What if you don’t meet the requirements?
As mentioned above, a residual income lower than the guidelines is not enough to deny a VA mortgage alone. If you are close to the guidelines and do not have a considering factor as we mentioned above, then a lender may deny your loan. However, keep in mind that each lender and underwriter are different and, where one may decline, another may feel you are close enough to the guidelines to qualify. If you have received a denial but believe you are close to the residual income guidelines, consider applying with another lender.
Residual income requirements provide additional security
While the residual income requirement may seem like another obstacle to home ownership, the VA put these guidelines in place to help protect veterans and active-duty service members from foreclosure. By ensuring that a borrower has the residual income available to meet additional expenses, they can better ensure that the borrower can comfortably make their mortgage payment each month without having to sacrifice in other areas of life. This added requirement helps to reduce the risk of foreclosure and keeps veterans and service members in their homes.
When you need help navigating the home-buying process
Buying a home can be overwhelming to even the most knowledgeable home buyer, but it doesn’t have to be. At Hero Home Programs, we work hard to help our everyday heroes, including veterans and service members, find and qualify for the home of their dreams.
If you are feeling overwhelmed with the loan process, our team can help find you the best loan options available and help walk you through the process. To learn more, request a consultation today.
