Explaining the VA’s Standard for Residual Income

VA loans remain the safest lending program on the market, despite the fact that nine in 10 come with no down payment.

One of the major reasons for that incredible security is a unique income standard that aims to ensure veterans can handle the financial burden of a new mortgage payment.

It’s called residual income.

Monthly Leftovers

Residual income applies only to VA loans.

Basically, residual income is how much money you have left over each month after all of your major expenses are paid. Those leftovers cover things like gas, food, clothing and other typical family needs.

The VA wants to know that veterans have enough residual income to keep their household afloat. A mortgage payment can put a significant strain on family finances. So prospective VA home buyers must have a minimum amount of residual income depending on where they live and how many people live in the home.

Here’s a look at the VA’s residual income break down:

Table of Residual Incomes by Region

For loan amounts of $80,000 and above

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

  $1062

   $1,039

   $1,039

   $1,158

over 5

Add $80 for each additional member up to a family of seven

So, as an example, a Missouri family of four must have at least $1,003 in residual income each month. The standards are higher on the coasts, where the cost of living is typically more expensive.

Additionally, if a family’s debt-to-income ratio is above 41% the residual income requirement increases by 20%.  So for the same Missouri family of four, if the DTI ratio is 42% the residual income requirement would increase to $1,204.

Failing to meet the residual income standard isn’t supposed to trigger automatic rejection of a loan application. But it can certainly be a deal breaker. This is a non-negotiable requirement.

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Photo thanks to Images_Of_Money via Flickr Creative Commons