When you apply for a VA home loan, your lender will analyze your personal financial situation to determine if you’re a good candidate for a loan.
Your FICO credit score and credit report contain important information, but those are not the only areas lenders examine. Lenders also consider your residual income.
Residual income is the money left after you pay your monthly debt obligations. These obligations include car payments, mortgages, student loans and credit card bills. After these payments, you can spend your residual income on personal expenses, such as gas, groceries and entertainment.
The VA might also refer to your residual income as your “balance available for family support.”
VA Residual Income Charts
Here are the residual income charts for VA loans under $80,000 and VA loans over $80,000. We’ve further broken each chart down by family size and location.
VA Residual Income Charts
|Table of Residual Incomes by Region for Loan Amounts of $79,999 and Below|
|over 5||Add $75 for each additional member up to a family of seven.|
|Table of Residual Incomes by Region for Loan Amounts of $80,000 and Above|
|over 5||Add $80 for each additional member up to a family of seven.|
VA Residual Income Regions
|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, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, Oklahoma, Puerto Rico, South Carolina, Tennessee, Texas, Virginia, Washington DC, West Virginia|
|West||Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington, Wyoming|
How Residual Income Is Reviewed For Home Loan Approval
While inadequate residual income may be reason enough to deny a VA mortgage under certain circumstances, it’s not the make-or-break determining factor, according to the VA’s lender handbook, VA Pamphlet 26-7.
The handbook instructs VA lenders to review your residual income “in conjunction with all other credit factors” and financial qualifications to determine your loan eligibility.
If a lender determines a borrower’s residual income is marginal, it must also reference the borrower’s credit history and past payment history on similar housing expenses.
VA Loan Debt-To-Income Ratio Versus Residual Income
Another underwriting factor VA lenders consider is your debt-to-income ratio (DTI).
While the VA’s residual income calculation measures what you have left after making essential payments each month, the debt-to-income ratio is a percentage that represents how deeply your debts cut into your monthly income.
If you have a 50% debt-to-income ratio, that means monthly debt eats up half of your paychecks.
The VA’s DTI calculation compares your gross monthly income to your total monthly debt payments, including housing expenses, installment debts and other obligations, listed in Section D of VA Form 26-6393.
VA lenders may scrutinize loan applications from borrowers with debt-to-income ratios greater than 41%.
However, a high DTI will not automatically trigger loan approval or rejection. Instead, lenders consider this ratio in conjunction with all other credit factors, including the size of your loan, your family size and where you plan to live.
To a VA lender, your DTI is secondary to your residual income. So if your DTI is higher than 41% but your residual income exceeds the VA’s guidelines by at least 20%, you may still qualify for a VA loan.
If your DTI is higher than 41% because of tax-free income, a VA lender can note that in your loan file. The underwriter’s supervisor may approve such loan applications with justification, according to the VA.
What Happens If Your Residual Income or DTI Does Not Meet Requirements?
When borrowers have low residual income or high debt rations, some compensating factors may still help the applicant get a mortgage, according to the VA.
These factors include:
- Excellent credit history
- Conservative credit use
- Minimal consumer debt
- Long-term employment
- Significant liquid assets
- Sizable down payment
- Equity exists in refinancing loans
- Little or no increase in shelter expenses
- Military benefits
- Satisfactory homeownership experience
- Low DTI ratio
- Tax credits for child care
- Tax benefits of homeownership.
However, these compensating factors will not offset unsatisfactory credit.
While shopping for a loan, remember that lender requirement and VA loan minimums are not always the same.
Reach out to your loan officer to discuss your lender’s guidelines.
|Debt-to-Income (DTI) Ratio Guidelines for VA Loans||VA Home Loan Credit Score Requirements|
|How to Improve Credit for a VA Loan||VA Home Loan Tools|
|Best VA Loan Lenders||VA Home Loan Options Overview|