If you’re interested in using your VA loan benefit to purchase or refinance your home, it’s important to consider VA residual income guidelines. To meet these guidelines, VA lenders will require some amount of residual income based on the following factors:
- The geographic region of the home you’re financing
- The amount your borrowing
- Your family size
- Other financial factors, such as your debt-to-income (DTI) ratio
It’s because of guidelines like residual income that VA loans have lower foreclosure rates than other mortgage types. The VA wants to make sure you can afford your home, even if you take advantage of the VA loan’s $0 down payment benefit.
What is VA Residual Income?
Residual income is the amount of money you expect to have left over each month after paying major expenses like your mortgage, loans, utilities and child care costs. The VA sets guidelines to ensure borrowers’ residual income is enough to cover the cost of typical family needs like food, fuel and clothing.
Residual income measures the total income and expenses for all borrowers of the VA home loan, so your spouse’s finances will be taken into account if you’re planning on having a co-borrower.
You may also hear residual income referred to as “discretionary income,” and major expenses might be called “significant debts or obligations.” Either way, the VA and your lender are simply working to confirm that your new mortgage payment won’t limit your ability to cover your family’s day-to-day living expenses.
VA Residual Income Charts for 2022
There are 3 main factors your lender and the VA will consider when determining your residual income requirement:
- Loan amount
- Family size
- Home location
The VA wants to have an idea of how much discretionary income you’ll need each month in order to afford typical family expenses. To determine what the expected VA residual income is for a home purchase, first confirm the geographic region of the home.
VA Residual Income Charts by Geographic Regions
|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, DC, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, Oklahoma, Puerto Rico, South Carolina, Tennessee, Texas, Virginia, West Virginia|
|West||Alaska, Arizona, California, Colorado, Wyoming, Hawaii, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington|
Now, check the VA residual income chart that applies to your mortgage, whether you’re planning to borrow above or below $80,000. Each table shows the residual income requirement based on the region and family size.
VA Residual Income Needed Chart for Loan Amounts of $79,999 and Below
For families over 5, add $75 for each additional family member up to seven.
VA Residual Income Needed Chart for Loan Amounts of $80,000 and Above
For families over 5, add $80 for each additional family member up to seven.
How to Calculate Your Residual Income
The first step to calculate your residual income is to sum up your total gross monthly income. Remember to include your co-borrower’s income if you plan to have one. Then estimate and subtract your income tax. Note that retirement savings like 401k disbursements are not factored into the residual income calculation.
Once you have calculated your income after tax, it’s time to subtract large monthly debts and obligations. These can include the following:
- Installment loans, such as student loans, car loans, and any other monthly loan payments
- Revolving loans that include credit cards or lines of credit
- Monthly mortgage payment, meaning the estimated payment you'll make on your new home including homeowners insurance and property taxes
- Child care, such as daycare, school, child support and alimony expenses
- Estimated utilities, consisting of anticipated electric, gas, phone, cable, and other costs
- Other major expenses, as applicable
VA Residual Income Calculations
|Gross Monthly Income||=$5,000|
|Installment Loans (Auto, Student Loans, etc.)||-$800|
|Revolving Loans (Credit Cards)||-$100|
|Child Care, Child Support and Alimony||-$300|
|Full Monthly Mortgage Payment||-$1,200|
|Estimated Utility Costs||-$280|
|Estimated Residual Income||=$2,200|
To perform this type of calculation, you'll need to know your monthly mortgage payment. To get a better idea of what to expect, use our mortgage calculator for additional insight into what your monthly payment might be.
Ultimately, the best way for borrowers to ensure you meet VA residual income guidelines is to talk to a lender. You can find and compare top VA lenders here.
Residual Income vs. DTI
Residual income and debt-to-income ratio, or DTI, are two different metrics with totally different VA loan requirements. Your DTI ratio is expressed as the percentage of your income that goes to pay your debts. Residual income is the amount of money left over after paying your debts.
As you can imagine, DTI and residual income are often related which is why it’s easy to confuse the two. Lenders consider both metrics and will sometimes use one to offset the other during the underwriting process.
What Happens if you Don't Meet Residual Income Guidelines?
The VA does not automatically deny borrowers who fail to meet the baseline residual income guidelines. The ultimate decision on whether or not to lend comes down to VA lenders. The VA is less likely to approve a loan application prepared by a lender if these guidelines are not met.
How VA Lenders Offset Residual Income
If you have income streams that are not within the household, you may be able to use those to improve your residual income qualifications. For example, if you have a working-age child who has enough income to cover their own monthly debts, it may be possible to remove that family member from your calculation. This may also include children who receive Social Security, disability benefits or child support.
A spouse who isn't directly involved with the purchase could also help reduce these income requirements. This is a spouse that has no claim to the title of the property and is not responsible for the mortgage loan. If a non-purchasing spouse has income that offsets a child living in the home, that could also help reduce the requirements.
Determining What You Can Afford
Residual income is about determining what Veterans can afford to borrow and still have enough to pay for their day-to-day living expenses. The VA residual income guidelines can help ensure that a borrower doesn't invest in a home they may struggle to pay for down the road.