How VA Residual Income Can Help You Get Approved
Posted on: January 28, 2017
If you plan to buy a home with a VA home loan, you’ll want to know about VA residual income and how this calculation can help you.
VA lenders calculate your residual income to make sure you have enough money left over each month for food, healthcare, and other family expenses. It’s an extra protection to ensure veterans have an affordable home buying option.
How do Lenders Calculate VA Residual Income?
You have probably heard of debt-to-income ratio, the calculation that looks at your monthly debt payments compared to your income.
The residual income calculation goes one step further and factors in other expenses like childcare, estimated utilities on the new home, child support (if any), and Social Security and income taxes. This calculation attempts to determine, or at least estimate, all your real-life expenses each month.
Residual income is calculated by subtracting all these expenses from your gross monthly income.
VA Residual Income Example
An example based on a $250,000 loan in Austin, Texas (South region) for a family of four:
|Your monthly gross income||$3,500|
|Spouse’s monthly gross income||+$2,500|
|Subtract state and federal taxes/Social Sec tax*||-$800|
|Credit card, auto loan, student loan payments||-$285|
|Estimated utilities (14 cents @ 1,800 sq ft)||-$252|
|Childcare /child support||-$750|
|Future mortgage payment, property tax & insurance, and HOA dues||-$1,709|
|VA Residual Income||=$2,204|
VA Residual Income Charts
Housing prices vary widely from one area of the country to another. Also, larger families need more money each month for additional family members. That’s why residual income is calculated on a sliding scale based on these factors. For instance, a family of two in the midwest United States needs less money each month than a family of five on the west coast. Residual income charts ensure VA home loan applicants can handle their house payment plus other living expenses.
VA Residual Income Charts for Loan Amounts above $80,000
VA Residual Income Chart: Loan amounts $80,000 and above
|More than 5||Add $80 per additional family member up to seven|
VA Residual Income Charts for Loan Amounts below $80,000
VA Residual Income Chart: Loan amounts $79,999 and below
|More than 5||Add $75 per additional family member up to seven|
Calculating Your VA Residual Income
The VA residual income can only be calculated accurately by your lender’s underwriter. However, you can get a general idea of your residual income level using the same process as shown in the above example.
Calculating Your VA Residual Income
|Your monthly gross income|
|Spouse’s monthly gross income||+|
state and federal taxes/Social Sec Taxes*
|Subtract credit card, auto loan, & student loan
|Subtract estimated utilities (14 cents per square foot based on home you wish to buy)||–|
|Subtract childcare expenses/child support||–|
|Subtract future mortgage payment, property taxes,
homeowners insurance, and HOA dues**
|Estimated VA Residual Income||=|
Related Article: Certificate of Eligibility Entitlement Codes
What if I’ve Been Turned Down For Low Residual Income?
According to the VA handbook, “VA’s minimum residual incomes are a guide. They should not automatically trigger approval or rejection of a loan.” The VA underwriter should be looking at your entire loan file and determine whether there are compensating factors that would override low residual income.
That being said, if you are very short on the residual income requirement, the underwriter can use that as a basis to deny the loan.
If you’ve been rejected by one lender, and you think your residual income level is close to guidelines, try having another lender look at your scenario. Each lender and underwriter is different. There’s a chance you could be approved even if you’ve been turned down before.
Is it Fair to Deny a Loan because of Residual Income?
You might think VA residual income requirements are just another hoop to jump through to get a VA home loan. But it’s actually an added protection for Veterans to ensure they have enough money left over for things like food, health care, clothing, car insurance, and gasoline.
After all, there’s no use owning a home if you can’t afford to drive to work.
When Residual Income Helps You Qualify
The VA loan underwriter looks at your complete file to find compensating factors. If you have a low credit score, a high debt-to-income ratio, or other negative factors about your loan file, a high residual income might help you qualify.
The VA Loan Handbook states that a debt-to-income ratio of more than 41% requires close examination, “unless…residual income exceeds the guidelines by at least 20 percent.” A high income compared to all your other regular expenses could push you over the top as far as qualification.
So if your residual income requirement is $1,003 per month, but you have at least $1,204 in residual income, the underwriter could approve your loan even if you’re over the debt-to-income ratio limit.
It makes sense. If you have a lot of extra money each month after all your bills are paid, there’s a lower chance of you defaulting on the loan in order to feed your family or take care of other necessities.
Yes, VA’s residual income requirement can cause some stress and cause you to worry that you won’t meet guidelines. But for many, this vital calculation can not only help them be approved for a VA home loan, but put their mind at ease that they can truly afford their new home.
VA Residual Income Regions
The amount of residual income you will need is based on where you will buy the home. Here’s how the VA defines the regions in the above charts:
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, D.C., 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
What Are Today’s VA Loan Rates?
VA mortgage rates are at historic lows. Veterans looking to buy a home are getting amazing value from this loan product.
Check your VA eligibility now, which comes with no obigation and can be started in minutes.