VA Loan Confidence: Understanding Residual Income

Discover the importance of residual income in the context of VA loans and how it affects your eligibility and borrowing power. When applying for a VA loan, lenders consider various factors to ensure your ability to meet your financial obligations. Residual income is one such factor that assesses your disposable income after accounting for major expenses. Understanding how residual income calculations work and how it impacts your loan approval process can help you navigate the VA loan journey with confidence. In this article, we delve into the concept of residual income and its significance in obtaining a VA loan, providing you with valuable insights to make informed decisions.

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 (DTI).

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 conclusion, residual income plays a crucial role in the VA loan process, reflecting your ability to manage your financial responsibilities beyond just credit scores and debt ratios. It is essential to familiarize yourself with the concept of residual income and its implications to ensure a smooth and successful VA loan application. If you're considering a VA loan, consult with a knowledgeable VA-approved lender who can guide you through the residual income requirements and help you determine your eligibility. Empower yourself with the necessary information and resources to maximize your chances of securing a VA loan and achieving your homeownership goals.

SOURCE:
Chapter 4. Credit Underwriting