Among the multiple underwriting requirements taken into account by your VA lender is residual income. This requirement factors into your eligibility when applying for a home loan because it aids in assessing the probability that you will be able to pay back the loan amount.The Department of Veteran Affairs residual income minimum requirement is generally attributed as large factor in why VA mortgages default at lower rates than all other major lending options.
Residual Income is the money left over after you have paid each of your monthly debt obligations. These monthly obligations would include your student loans, car payment, mortgage, and credit card bills. After these payments, you have your residual income which is typically used for personal expenses such as gas, groceries, entertainment, etc. Another way to look at this is by simply subtracting your debt/obligatory monthly bill payments from your expendable income, thus determining your residual income.
The Department of Veteran Affairs has set a residual income minimum requirement that differs according to the number of family members living in your home and the location of your household within the U.S. The reason that the VA has a residual income requirement is to ensure that your family has enough money to pay for monthly expenses as well as daily expenses.
The requirements for residual income differ from the Midwest, the Northeast, the South, and the West. The requirements also differ with each additional family member.
If your family has over 5 people there is an additional $75 dollars tacked onto the residual income requirement (up to a family of 7). So if you have 6 people in your home and you live in Ohio, your residual income requirement would be $977.
For loan amounts of $80,000 and above, residual income must be over:
If your family has over 5 people there is an additional $80 tacked onto the residual income requirement (up to a family of 7). For example, if you live in Louisiana and there are 7 people in your family, your residual income requirement would be $1,199.
In addition to your residual income, the VA will also consider your debt to income ratio (DTI) in determining if you meet the minimum qualifying requirements for a VA loan. DTI is essentially how much money you make to how much debt you currently owe.
- Annual Income: $72,000 Monthly Debt: $2,000
- Divide by 12 to determine monthly income 72,000/12 = $6,000 monthly
- Monthly debt obligations 2,000/6,000 = 33 percent
- Debt To Income = 33 percent
The lower your debt to income ratio the better, a low DTI shows lenders that there is a balance between how much you are making and how much debt you have. Your residual income and DTI are both used to decide how much your maximum loan amount will be. Your residual income and DTI are equally important factors in determining if you qualify for a loan.
Generally the acceptable DTI to be approved for a conventional VA loan is 41 percent, but can be as high as 71 percent depending on compensating factors (number of children, credit, etc.). If you are applying for a VA jumbo loan, the cap is usually 41 percent, but could differ with lenders.
If you have questions about residual income, DTI, or are interested in applying for a VA loan, call VA Home Loan Centers at 888-573-4496 or use the application form below.