Understanding Residual Income for VA Loans
A VA loan is a type of mortgage backed by the U.S. Department of Veterans Affairs and is available to current service members, veterans and eligible surviving spouses. VA loans offer several advantages, including no private mortgage insurance (PMI) and no down payment required. When qualifying for a VA purchase or refinance, you need to meet certain minimum residual income requirements based on your requested loan amount, where you will be buying, and how many people will live in the home. Here’s how it works:
What is the Residual Income Requirement?
When your lender reviews your qualification for a VA loan, they consider overall debts (credit card expenses, installment loans, and your new mortgage expense). They also go one step further to look at additional every day expenses (such as food, clothing and gas) in order to ensure you have enough funds each month to cover basic living expenses, as well as the mortgage. This is known as the Residual Income Requirement. It is a realistic way of evaluating affordability to verify that the household can stay afloat with the added mortgage expense.
How is Residual Income Calculated?
VA residual income guidelines consider major monthly expenses. A key component of the calculation will be your new mortgage payment. To calculate your residual income a lender will take your gross monthly income and subtract the following: auto and student loans, credit cards, state and federal taxes, childcare/support/alimony, utility costs, and your monthly mortgage payment. What’s left over is considered your residual income. Your lender and the VA review Residual Income to protect veterans and ensure they can afford the home long term. This part of the process may be a major reason why VA loans have a low foreclosure rate.
What are the requirements for Residual Income?
Residual income requirements are calculated on a sliding scale based on the loan amount, the location of the home and the size of the family. Below is an example of a residual income requirement chart for loan amounts over $80,000.
If you are eligible for a VA loan it may be a favorable option for you to consider. Talk to a loan advisor to review your eligibility and discuss your specific loan needs.