Explaining the VA’s Standard for Residual Income

VA loans have been the safest mortgages on the market for most of the last eight years.

The fact that a $0 down payment loan program has led the way in terms of foreclosure avoidance is arguably one of the biggest under-the-radar stories of the housing crisis.

There are a couple major driving forces behind the safety and stability of this long-cherished benefit program. One is the VA Loan Guaranty Program’s commitment to helping veterans keep their homes. VA officials can intercede on behalf of struggling homeowners and advocate for lenders and mortgage services to consider alternatives to foreclosure. Those efforts have helped more than 500,000 VA homeowners avoid foreclosure since the housing crash.

Another big reason why VA loans are so safe 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.

Residual Income Requirements for 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 borrowers looking to start the VA loan process must have a minimum amount of residual income depending on where they live and how many people live in the home.

For loan amounts of $80,000 and above, residual income must exceed:

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

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 higher.

Lenders may reduce the residual income requirement by 5 percent for active duty service members.

In addition, you may be able to exempt any self-sufficient dependents from the residual requirement if they have enough net income to offset their own debts.

Residual Income and DTI Ratio

This standard is different from yet tied to debt-to-income ratio, which is another important consideration for VA lenders.

If a VA buyer’s debt-to-income ratio is above 41 percent, the residual income requirement increases by 20 percent.  So for the same Missouri family of four, if their DTI ratio is 45 percent, 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 VA home loan application. But it can certainly be a deal breaker. This is a non-negotiable requirement.

Photo thanks to Images_Of_Money via Flickr Creative Commons