The VA’s residual income guideline offers a powerful and realistic way to look at affordability and whether new homeowners have enough income to cover living expenses and stay current on their mortgage.
Residual income is a major reason why VA loans have such a low foreclosure rate, despite the fact that about 9 in 10 people purchase without a down payment.
The heart of this is discretionary income. Residual income looks at how much money you have leftover 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 new strain on family finances. So borrowers looking to start the VA loan process will need a minimum amount of residual income depending on their loan amount, where they live and how many people live in the home.
The residual income minimums reflect how housing costs and other expenses vary based on family size and where in the country you’re buying. That’s why larger families in the Northeast and the West need more residual income than similar families in the Midwest and South.
VA also requires less residual income for borrowers with loan amounts below $80,000.
Here’s a look at the VA’s residual income tables by region:
Family Size Over 5: Add $75 for each additional member up to a family of seven.
Family Size Over 5: Add $80 for each additional member up to a family of seven.
|Northeast||Connecticut, Maine, Massachusetts New Hampshire, New Jersey, New York, Pennsylvania, Rhode, Island, Vermont|
|Midwest||Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, Wisconsin|
|South||Alabama, Arkansas, Delaware, DC, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, Oklahoma, Puerto Rico, South Carolina, Tennessee, Texas, Virginia, West Virginia|
|West||Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington, Wyoming|
The VA instructs lenders to count all members of a household, including children from a previous marriage who depend on the borrower for financial support.
Lenders may be able to reduce the residual income requirement by 5 percent for active duty service members and borrowers purchasing within close proximity of a military installation. These borrowers may have access to cheaper, tax-free goods on the installation.
The VA residual income guidelines consider only major monthly obligations. Lenders aren’t going to hunt through your bank statements to determine how much you spend on small-ticket items.
A key component of the residual income calculation will be your new mortgage payment.
Generally, here’s how VA lenders will calculate a borrower’s residual income:
|Gross monthly income||=$5,000|
|Installment loans (ex: auto & student loans)||-$800|
|Revolving loans (ex: credit cards)||-$100|
|Child care/child support/alimony||-$300|
|Full monthly mortgage payment||-$1,200|
|Estimated utility costs||-$280|
|Estimated residual income||=$2,200|
Lenders can pull most of these monthly expenses directly from your credit report. They may inquire about others in order to obtain the best estimate possible.
To estimate monthly utility costs, VA lenders will multiply the home’s square footage by 0.14 percent. For example, the monthly utility cost estimate for a 2,000-square-foot home would be $280 (2,000 x 0.14).
Residual income and debt-to-income ratio are interconnected financial guidelines for VA lenders. VA encourages lenders to put more weight on residual income than DTI ratio, and prospective borrowers with higher debt ratios will typically need to meet a higher standard for residual income.
At Veterans United, all borrowers with a DTI ratio above 41 percent must have enough residual income to exceed their guideline by 20 percent.
For example, a family of four in the Midwest would typically need $1,003 in residual income. But if their DTI ratio is higher than 41 percent, they’ll need at least $1,204 in residual income each month.
Prospective VA buyers who have income streams within the household that aren’t being considered for loan qualification may be able to use that money to lighten their residual income guideline.
Lenders may be willing to remove family members from the residual calculations if a non-purchasing spouse or a working-age child has sufficient income to cover their monthly debts. This can include children who receive Social Security or disability income, child support and other forms of income, provided it’s likely to continue for at least three years.
It’s possible for a non-purchasing spouse’s income to offset any children living in the home for residual income purposes.
Here’s a general example of how this can work.
Let’s say our same Midwestern family of four is buying a $200,000 home. Normally, they would need at least $1,003 in residual income. But if the non-purchasing spouse has enough monthly income to cover their debts and the difference in residual income, lenders can treat this family of four as a family of three for residual income purposes.
In this example, the non-purchasing spouse would need at least $114 leftover each month after paying debts. That’s the difference between the residual requirement for a family of four ($1,003) and the requirement for a family of three ($889).
Guidelines and policies on residual income offsets can vary by lender. Veterans United does allow for residual offsets for eligible borrowers. Talk with a Veterans United loan specialist for more details.
Failing to meet the residual income standard isn’t supposed to trigger automatic rejection of a VA home loan application. But a clearly inadequate residual income can lead to a loan denial. The VA does not define “clearly inadequate,” which means approaches can vary by lender.
At Veterans United, we typically require borrowers to meet their residual income requirement, with rare exceptions.
Remember, a huge part of the residual income calculation is your new projected mortgage payment. If your residual income is on the margins, one way to adjust might be to set your sights a little lower in terms of your homebuying budget.