Residual income, in the context of VA loans, refers to the remaining amount of money after deducting all anticipated expenses from the borrower’s income (Veterans United, 2022). These expenses may include loans, childcare, utilities, and others.
Key Facts
- Definition: Residual income is the amount of money that remains after deducting all expected expenses, such as loans, child care, utilities, and more, from the borrower’s income.
- VA Residual Income Charts: The VA has established residual income minimums based on family size, loan amount, and geographic location. Larger families in the Northeast and West regions generally require more residual income compared to similar families in the Midwest and South regions. The charts provide specific residual income requirements based on loan amount and region.
- Calculation: To calculate residual income, lenders consider significant monthly obligations such as installment loans, revolving loans, child care/child support/alimony, the full monthly mortgage payment, and estimated utility costs. Lenders may also estimate monthly utility costs by multiplying the home’s square footage by 0.14 percent.
- Residual Income and DTI Ratio: Residual income and debt-to-income (DTI) ratio are interconnected financial guidelines for VA lenders. While both are considered, VA encourages lenders to put more weight on residual income. Borrowers with higher DTI ratios typically need to meet a higher standard for residual income. For example, if a family’s DTI ratio is higher than 41 percent, they will need at least 20 percent more residual income than the guideline for their family size and region.
- Offsetting Residual Income: Prospective VA buyers who have additional income streams within the household that are not considered for loan qualification may be able to use that money to offset their residual income guideline. Lenders may remove family members from the residual income calculations if a non-purchasing spouse or a working-age child has sufficient income to cover their monthly debts.
It is important to note that the specific residual income requirements and guidelines may vary by lender. It is recommended to consult with a VA-approved lender for accurate and up-to-date information regarding residual income on a VA loan.
VA Residual Income Charts
The VA has established minimum residual income requirements based on family size, loan amount, and geographic location (Veterans United, 2022). These charts provide specific income thresholds that borrowers must meet to qualify for a VA loan.
Calculation
To calculate residual income, lenders consider various monthly obligations, such as installment loans, revolving loans, childcare expenses, alimony, the full monthly mortgage payment, and estimated utility costs (VA Mortgage Center, 2024). Utility costs may be estimated by multiplying the home’s square footage by 0.14 percent (VA Mortgage Center, 2024).
Residual Income and DTI Ratio
Residual income and debt-to-income (DTI) ratio are interconnected financial guidelines for VA lenders (Quicken Loans, n.d.). However, the VA emphasizes residual income as a more significant factor. Borrowers with higher DTI ratios may need to meet a higher residual income requirement. For instance, if a family’s DTI ratio exceeds 41%, they will require at least 20% more residual income than the guideline for their family size and region (Quicken Loans, n.d.).
Offsetting Residual Income
Prospective VA buyers with additional household income streams that are not considered for loan qualification may use those funds to offset their residual income guideline (VA Mortgage Center, 2024). Lenders may exclude family members from residual income calculations if a non-purchasing spouse or a working-age child has sufficient income to cover their monthly expenses (VA Mortgage Center, 2024).
Conclusion
Residual income is a crucial factor in VA loan eligibility. It ensures that borrowers have sufficient funds to cover their living expenses after making mortgage payments, reducing financial risk. Lenders use residual income charts and consider DTI ratios to evaluate a borrower’s financial capacity. By meeting these requirements, borrowers can access the benefits of the VA loan program.
References
- Quicken Loans. (n.d.). VA Residual Income Chart And Requirements. Retrieved from https://www.quickenloans.com/learn/residual-income
- VA Mortgage Center. (2024). VA Loan Residual Income Guidelines and Charts for 2024. Retrieved from https://www.vamortgagecenter.com/answers/va-loan-residual-income/
- Veterans United. (2022). VA Loan Residual Income Charts and Requirements with Example Calculation. Retrieved from https://www.veteransunited.com/valoans/explaining-the-vas-standard-for-residual-income/
FAQs
What is residual income on a VA loan?
Residual income is the amount of money left over after deducting all expected expenses, such as loans, child care, utilities, and more, from the borrower’s income.
How does the VA determine residual income requirements?
The VA has established residual income minimums based on family size, loan amount, and geographic location. Larger families in the Northeast and West regions generally require more residual income compared to similar families in the Midwest and South regions.
How is residual income calculated for a VA loan?
Lenders consider significant monthly obligations such as installment loans, revolving loans, child care/child support/alimony, the full monthly mortgage payment, and estimated utility costs. Utility costs may be estimated by multiplying the home’s square footage by 0.14 percent.
What is the relationship between residual income and DTI ratio for VA loans?
Residual income and debt-to-income (DTI) ratio are interconnected financial guidelines for VA lenders. While both are considered, VA encourages lenders to put more weight on residual income. Borrowers with higher DTI ratios typically need to meet a higher standard for residual income.
Can I use additional income streams to offset my residual income requirement?
Yes, prospective VA buyers who have additional income streams within the household that are not considered for loan qualification may be able to use that money to offset their residual income guideline.
What happens if I don’t meet the residual income requirement?
If you do not meet the residual income requirement, you may still be able to qualify for a VA loan if you have compensating factors, such as a high credit score or a history of stable employment.
How can I increase my residual income?
There are several ways to increase your residual income, such as reducing your expenses, increasing your income, or exploring additional income streams.
Is residual income the only factor considered for VA loan approval?
No, residual income is just one of several factors considered for VA loan approval. Lenders will also review your credit history, DTI ratio, and other financial information.