VA Residual Income: What is it?

VA Residual Income is a term used in the context of home loan eligibility for veterans in the United States. It refers to the income a borrower has left over each month after paying all their significant expenses, such as housing, utilities, and debt payments. This residual income is a critical factor in determining a borrower's ability to repay a loan and is used by lenders to evaluate their creditworthiness.

VA Residual Income is calculated based on various factors, including the borrower's income, expenses, and family size, and varies depending on the location of the property being purchased. Understanding VA Residual Income is essential for veterans looking to buy a home using a VA loan.

VA Residual Income Guidelines

This is the amount you must have left over each month after paying all your debts and other expenses, such as your mortgage payment, car payment, credit card payments, student loans, and child care expenses. The VA regularly reviews and updates its requirements to keep up-to-date on the latest information.

VA Residual Income Calculation

There is no minimum residual income requirement from the VA, but most lenders want to see at least some positive residual income before approving a VA loan.

For example, if John Doe has a monthly payment of $3,000 and monthly expenses of $500, his residual income would be $2,500 ($3,000 - $500). If John had zero residual income, this would be cause for concern for most lenders, but with positive residual income each month, he should have no trouble qualifying for a VA loan.

VA Residual Income Chart 2023

For home loans under $79,999 and loans over $80,000, the Department of Veterans Affairs (VA) has a residual income requirement. Depending on the loan amount and family size, this requirement changes. For illustration, the VA requires a residual income of at least $5,337 per month for a borrower with a loan amount of $700,000 and a family size of four. After paying all debts and expenses, the borrower must have an annual income of $5,337.

The VA has a residual income required to ensure borrowers can afford their mortgage payments. The borrower is encouraged to aim for a higher residual income to give themselves more financial flexibility. It is important to note that this is just a minimum requirement.

Lenders will weigh various factors before approving a home loan, including the VA's residual income requirement. Additionally, borrowers must know conditions like credit score and debt-to-income ratio.

Residual Income Chart for Loan Amounts Less Than $79,999

Residual Income Chart for Loan Amounts Greater Than $80,000

What if I Don't Meet the Minimum VA Residual Income?

If the VA residual income or DTI (debt-to-income) ratio does not meet the requirements, it could affect the borrower's ability to obtain a VA loan. Residual income is the amount left over each month after paying essential expenses, such as housing, food, and transportation.

The VA requires borrowers to have a certain residual income level to ensure they can afford their mortgage payments. DTI is the percentage of the borrower's income to pay their debts, including the mortgage.

If the borrower's DTI ratio is too high, they have too much debt and may have trouble making mortgage payments. If the borrower does not meet the requirements for either VA residual income or DTI, they may need to improve their financial situation before being eligible for a VA loan.

The VA states that even if a potential borrower has a low residual income or high debt ratio, certain compensating factors could help the applicant get a mortgage, including:

conservative use of consumer credit,
excellent credit history,
high residual income,
little or no increase in shelter expenses,
long-term employment,
low debt-to-income ratio,
military benefits,
minimal consumer debt,
satisfactory homeownership experience,
significant liquid assets,
sizable down payment,
tax benefits of homeownership.
tax credits for child care, and
the existence of equity in refinancing loans,

Does My VA Disability Count as Income?

As a disabled Veteran receiving benefits from the Department of Veterans Affairs (VA), you may wonder if your disability payments count as income to qualify for a home loan.

The answer is yes! Any residual income can be used to qualify for a VA home loan. Furthermore, VA does not withhold taxes from disability benefits, and you are not required to report them as income on your tax return. Disability compensation and pension payments for disabilities paid to veterans or their families are also exempt from taxes.

How Does Residual Income Work for VA Loans?

When applying for a VA home loan, knowing how residual income plays a role is essential. Lenders will look at your total monthly residual income to determine if it meets the minimum requirements set by the VA. If your income meets the stipulated conditions, you'll be one step closer to owning your home.

Disabled Veterans should note that their residual income will be considered when applying for a VA loan. If your total monthly residual income is sufficient, you could be on your way to purchasing the home of your dreams.

Can VA Residue Income Be Grossed Up?

The VA allows non-taxable income to be "grossed up by 25%" for debt-to-income analysis but not for residual income analysis.

Conclusion

In finance, "residual income" refers to the amount of money you have left after all your expenses have been paid. For veterans, VA residual income can provide a valuable supplement to their monthly income. This can be useful when financing a VA mortgage, as lenders must ensure borrowers have enough discretionary income to cover any additional monthly debt they might take on.

The residual income required to qualify for a VA loan depends on the borrower's location and family size. This is because the VA sets guidelines for how much a family of a specific size should be able to spend on essential living expenses. The amount of residual income left over after these expenses have been paid is what lenders look at when determining if an applicant is approved for a VA loan.

In addition, veterans looking to take advantage of their VA benefits should be aware that the VA has set a minimum monthly residual income requirement. This is to ensure that veterans have enough discretionary income left over to cover any unexpected expenses that may arise.

The VA residual income can be a lifesaver for veterans with a high debt-to-income ratio. A high DTI can make getting approved for a mortgage difficult, as lenders are concerned about your ability to make your monthly mortgage payments. However, if you have enough residual income left over after all your expenses have been paid, a VA lender may be able to work with you to get you approved for a mortgage.

Overall, understanding your VA residual income can be valuable when financing a VA mortgage. You can ensure enough discretionary income to cover any unexpected expenses with the proper residual income.

SOURCE:
Chapter 4. Credit Underwriting