How To Calculate VA Residual Income | 2023 Charts
If you plan to buy a home with a VA loan, you’ll want to know about VA residual income and how this calculation can help you.
What is VA residual income?
Residual income is the amount of discretionary money you have leftover each month after your fixed expenses. Fixed expenses include your mortgage payment, healthcare, food, gas and other family expenses.
VA lenders calculate residual income — along with debt-to-income ratio (DTI) — to make sure you will be able to afford your loan’s monthly mortgage payment.
VA loans require no down payment, so they tend to start with a higher loan-to-value ratio (LTV). Ordinarily, high LTV mortgages have higher foreclosure rates. In addition to the VA guarantee, lenders reduce the risk typically associated with high LTV loans by calculating the residual income, which helps VA borrowers get lower interest rate mortgages.
How do lenders calculate VA residual income?
You have likely heard of debt-to-income ratio, the calculation that looks at your monthly debt payments compared to your income.
The residual income calculation takes DTI a step further, factoring in additional expenses like child care, 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, which is the amount you earn before state and federal income tax and benefits get deducted.
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 2023
Housing prices and the overall cost of living vary widely in different geographic regions of the U.S. Also, larger families need more money each month. So the Department of Veterans Affairs bases residual income on these two 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.
Residual income charts for VA loan amounts above $80,000
|More than 5||Add $80 per additional family member up to seven|
Residual income charts for VA loan amounts below $80,000
|More than 5||Add $75 per additional family member up to seven|
Calculating your VA residual income
VA residual income can be calculated accurately only 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.
|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||=|
*The VA loan underwriter looks at an IRS publication for an estimate of your income taxes. The underwriter’s calculation may be different than your paystubs. **Contact a loan officer for an accurate future housing payment.
Related Article: Certificate of Eligibility Entitlement Codes
What if I’ve been turned down because of low residual income?
According to the VA Lender’s Handbook, “the 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 to determine whether there are compensating factors that would override low residual income.
Compensating factors could include a large savings account with six months of cash reserves or extra financial support from a family member who isn’t applying as a co-borrower.
That being said, if you are very short on the residual income requirement, the underwriter could use that as a basis to deny the mortgage loan. VA-authorized lenders have a lot of leeway to approve and deny loans.
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.
Even though the VA sets loan guidelines, 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 guidelines are just another hoop to jump through to get a VA home loan. But this requirement is actually an added layer of protection for veterans and active-duty service members.
Meeting the VA’s residual income guidelines ensures borrowers have enough money left over for things like food, health care, clothing, car insurance, and gasoline. These rules help protect borrowers from excessive housing expenses.
After all, it’s hard to benefit from homeownership when you can’t afford to drive to work.
What happens if your residual income or DTI does not meet the requirements?
If you exceed the VA’s DTI of 41% and you can’t meet the residual income guidelines for a VA loan, you will have a harder time qualifying for the loan.
If you shop around enough, you may find a VA lender who is willing to approve your application even if you exceed DTI and don’t meet VA residual income guidelines.
But the lender would have to take a bigger risk by approving your mortgage. It could help if you were making a down payment, even though the VA loan program does not require one.
A down payment would reduce your foreclosure risk, from the lender’s point of view. This could help the lender look past the weaknesses in your application. It could also help if you have an excellent credit score, one in the mid-700s.
But in most cases, lenders want your residual income to compensate for your high DTI. They won’t look favorably on a high DTI and a low level of residual income.
An FHA loan may help
Borrowers in this situation may do better with an FHA loan that has a higher DTI threshold. It’s possible to get approved for an FHA loan even if your DTI is pushing 50%. Plus, the FHA loan program works for borrowers with credit scores as low as 580.
What’s the catch? FHA loans always require a down payment of at least 3.5%. That’s $7,000 on a $200,000 home. And the FHA charges upfront and annual mortgage insurance premiums while the VA requires only an upfront funding fee.
Later, you could refinance out of the FHA loan and into a VA cash-out refinance. This would eliminate the FHA’s ongoing mortgage insurance requirement.
How does DTI impact residual income for VA loans?
DTI shows lenders the financial impact of your current debts. Lenders total up your car payments, student loan payments, personal loan payments, and the minimum payments due on your credit cards. Then, the lender compares your total debt payments to your gross monthly income.
A DTI of 40% means you’re spending 40% of your money on debt each month, leaving 60% for all your other expenses.
So DTI affects your amount of residual income, which makes sense: Money you’re spending on debt payments can’t be used for anything else.
But you could have a higher DTI and still meet residual income guidelines. For example, someone who buys a smaller, energy-efficient home, doesn’t use much gasoline, and sends their kids to public school instead of paying private school tuition should have more residual income than someone who has a higher cost of living.
When residual income helps you qualify
The VA loan underwriter looks at your complete loan file to find compensating factors. If you have a low credit score, a high debt-to-income ratio, or other negative credit factors in your loan file, a high residual income might help you qualify.
The VA Lender Handbook states that a debt-to-income ratio higher than 41% requires close examination, “unless…residual income exceeds the guidelines by at least 20%.” A high income compared to all your other regular expenses could push you over the top in terms of 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 41% 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 making late payments in order to feed your family or take care of other necessities.
Lenders know that borrowers who can make monthly mortgage payments more easily are a lot less likely to go into foreclosure.
Yes, VA’s residual income requirement can cause some stress, especially for first-time homebuyers who aren’t used to a lender’s scrutiny of their financial lives. But for many borrowers, 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 by geographic 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
VA residual income chart FAQs
How do I calculate VA residual income?
To find your approximate residual income, add up your regular monthly living expenses and subtract the total — along with your debt payments — from your gross monthly income. The money leftover after paying living expenses and debt is your residual income, which is also known as your discretionary income.
How much residual income does a VA loan require?
Residual income guidelines vary by household size and geographic region. See the VA residual income charts above to find the guideline that applies to your household size and region. Also, keep in mind that residual income is a guideline and not a make-or-break requirement.
What is VA residual income?
There’s more to getting approved for a mortgage than checking your credit report. Calculating your residual income helps VA lenders get a fuller picture of your financial life. A loan applicant with a high residual income is an applicant who is more likely to keep monthly mortgage payments up to date. A high level of residual income can help you qualify for a VA loan if you’re on the fence with your credit score and DTI.
How much can you gross up to in VA disability income on a VA loan?
VA lenders can gross up your VA disability income by up to 25% when they measure your debt-to-income ratio. They do this because disability income isn’t taxed like income from work. However, the VA says lenders should not gross up income when they measure your residual income.
How does residual income impact high DTI?
When you have a high DTI, lenders may still be able to approve your loan if you surpass the VA’s residual income requirements by 20% or more. If you have a high DTI and a low amount of residual income, getting a loan approval will be more difficult.
What are today’s VA loan rates?
VA mortgage interest rates tend to be lower than interest rates on FHA and conventional loans. Veterans and service members looking to buy a home are getting amazing value from this loan product.