Residual income is the discretionary income that remains each month after paying all significant expenses, including mortgage payments. It serves as a key determining factor in obtaining a VA loan, as it reflects your ability to meet financial obligations while still being able to afford other living expenses such as utilities, food and clothing.
This guideline ensures that Veterans have enough residual income to cover various family needs after the mortgage payment, thereby reducing the risk of foreclosure.
Why does the VA have a residual income requirement?
The VA residual income requirement serves as a safety net to prevent Veterans from overextending their financial obligations. While it may seem like a stricter requirement, the VA’s focus on residual income helps to explain why VA loans have such a low foreclosure rate.
VA Residual Income Calculations
Calculating your residual income may sound kind of tricky, but I promise it’s more bark than bite.
First, lenders aren’t looking to see if you have Disney+ for VA residual income calculations. Instead, they’re looking at your consistent higher-cost obligations, such as your car or credit card payment.
Let’s look at an example where a veteran brings in $6,000 a month. With roughly $3,300 in major fixed monthly costs.
| Payment / Income | Amount ($) |
|---|---|
| Gross Income | $6,000 |
| Car Payment | -$600 |
| Credit Card Payment | -$215 |
| Rent / Mortgage Payment | -$1,800 |
| Daycare / Private School / Child Support | -$350 |
| Utilities (gas, electric, water, internet) | -$350 |
| Residual Income | $2,685* |
How to Calculate Residual Income for VA Loans
VA residual income is calculated by subtracting estimated monthly expenses from your gross monthly income. The expenses considered in this calculation include installment loans (e.g., auto and student loans), revolving loans (e.g., credit cards), child care or child support payments, the full monthly mortgage payment and estimated utility costs. Utility costs are estimated by multiplying the home’s square footage by 0.14 percent.
VA Residual Income Charts 2024
The VA’s minimum residual income requirements vary by factors such as loan amount, family size and the property’s geographical location. Residual income is also determined by geographical regions within the United States.
Below, we provide an outline of the four regions and include the VA residual income charts for loan amounts of $79,999 and below and loan amounts of $80,000 and above.
VA Residual Income Geographical Regions
| Region | States |
|---|---|
| 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, District of Columbia (DC), 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: Loan Amounts of $79,999 and Below
| Family Size | Northeast | Midwest | South | West |
|---|---|---|---|---|
| 1 | $390 | $382 | $382 | $425 |
| 2 | $654 | $641 | $641 | $713 |
| 3 | $788 | $772 | $772 | $859 |
| 4 | $888 | $868 | $868 | $976 |
| 5 | $921 | $902 | $902 | $1,004 |
| For families over five, add $75 for each additional member up to a family of seven. |
VA Residual Income: Loan Amounts of $80,000 and Above
| 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 |
| For families over five, add $80 for each additional member up to a family of seven. |
What happens if my residual income does not meet the requirements?
If your residual income does not meet the VA guidelines, there are ways to improve it. These steps may include:
- Reducing monthly debt payments
- Increasing income sources
- Considering a lower mortgage amount
It’s essential to understand that the VA’s minimum residual incomes are a guide and should not automatically trigger approval or rejection of a loan. Lenders will consider residual income in conjunction with all other credit factors.
This means factors like your credit history, the purchase price of the property, debt-to-income ratio and even the ages of your dependents could be considered when assessing your residual income.
Debt to Income Ratio and Residual Income
Your debt-to-income ratio (DTI) plays a significant role in the VA’s residual income considerations. DTI refers to the percentage of your gross monthly income that goes towards paying debts. A lower DTI can improve your chances of qualifying for a VA loan, showing you have sufficient income to cover your existing debts and any new ones, including your mortgage.
On the other hand, a high DTI could be a concern for lenders as it could indicate that you are overburdened with debt and may struggle to manage additional loan repayments. Borrowers with higher DTI ratios may expect to meet stricter residual income requirements to be approved for a VA home loan.
What if I’ve been turned down because of low residual income?
If you’ve been denied a VA loan due to low residual income, don’t worry! In addition to the steps above, there are several resources available to increase your chances of loan approval.
A great option to explore is the appeal process provided by the VA. If you believe your denial was unjustified, you have the right to appeal the decision. Seek guidance from a financial advisor or a home loan specialist who can help you understand the best approach for your situation.
It’s essential to remember that loan denials are not necessarily permanent. Credit scores can change over time, and improvements in income levels may lead to different outcomes. If you were unable to secure a loan immediately after the denial, you may find yourself on the path to homeownership within months of the original decision. Stay persistent, take the necessary steps to improve your financial standing, and keep pursuing your goal of becoming a homeowner through the VA loan program.
Wrapping Up VA Loans and Residual Income
It’s important to remember that residual income is only one factor in the VA loan approval process. Even if you don’t meet the residual income guidelines, the right lender will work with you to help achieve your dream of VA homeownership.
Check out the top VA loan lenders to start your journey today!
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