Residual Income for VA Loans: What It is, and How Much You Need

Marcus Marion, CMA™ 1 month ago 0 11

The Department of Veterans Affairs has specific requirements relating to VA home loans,
and one of those requirements relates to what’s known as “residual income.”

The short version: Borrowers who use a VA loan to buy a house should have some money
left over each month after their mortgage payment and other recurring debts. But the
amount that they need can vary based on geographical location and family size, with
plenty of leeway.

Here’s what borrowers should know about residual income requirements for VA loans.

What Is ‘Residual Income’ Exactly?

You already know what income is, so let’s talk about the word “residual.”

The dictionary defines residual as “what remains after most of something is gone.” In other words, it’s another way to describe something that’s left over after a usage or depletion.

When it comes to mortgage loan qualification—and the VA loan program in particular— residual income refers to the money that a person has left over each month after paying all of their bills.

In their “VA Pamphlet 26-7,” which serves as the official handbook for mortgage lenders, the Department of Veterans Affairs states the following:

“Residual income is the amount of net income remaining (after deduction of debts and obligations and monthly shelter expenses) to cover family living expenses such as food, health care, clothing, and gasoline.”

If a person has a net income of $6,000 per month, and they spend $3,500 per month on all recurring debts (including the mortgage payment), the residual or leftover income would equal $2,500. This is the money they could use for their other living expenses such as groceries, clothing, etc.

So, why does the Department of Veterans Affairs require residual income for VA loans? Basically, they want to make sure that borrowers only get approved for a mortgage amount that they can comfortably afford to repay.

This in turn helps to reduce the risk of financial hardship and foreclosure. In short, residual income is a common-sense home loan requirement that benefits all parties involved.

The Amount Depends on Location and Family Size

The next logical question is: How much residual income does a borrower actually need, in order to qualify for a VA-backed mortgage loan?

Residual income requirements for VA loans vary based on location and the size of the family. Depending on these variables, it can range from around $450 to just over $1,000 per month.

The VA actually has two sets of residual income requirements, based on the size of the loan. One set applies to borrowers who obtain financing for $79,999 or less, while the second set applies to loan amounts of $80,000 or above.

This table shows the residual income guidelines for smaller loan amounts:

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The second table shows the guidelines for loans of $80,000 and up (i.e., most borrowers):

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But there are exceptions to these general rules. For instance, a borrower who falls short of the residual income requirement but has excellent credit could still qualify for a VA loan.

This is what the Department of Veterans Affairs refers to as a “compensating factors.” So let’s shift gears now and look at some of those compensating factors.

Exceptions and Compensating Factors

The tables shown above represent general guidelines for mortgage lenders. So those numbers are not necessarily set in stone.

The Department of Veterans Affairs gives mortgage lenders some flexibility, when it comes to residual income for borrowers seeking a VA loan. They allow for certain compensating factors for situations where a person’s residual income is a bit lower than the ideal range.

As it states in the official guidelines:

“VA’s minimum residual incomes (balance available for family support) are a guide. They should not automatically trigger approval or rejection of a loan. Instead, consider residual income in conjunction with all other credit factors.”

The “other credit factors” mentioned in this quote include everything from the borrower’s credit score to their past history of debt repayments. The point is that mortgage lenders make approval decisions based on a bigger picture, rather than a single qualifying factor.

According to the Department of Veterans Affairs, mortgage lenders can consider the following compensating factors for VA loan borrowers with a less-than-ideal level of residual income.

  • excellent credit history
  • long-term stable employment
  • significant liquid assets
  • conservative use of consumer credit,
  • minimal consumer debt,
  • sizable down payment (even when a down payment is not required)
  • previous success as a homeowner

But the lender doesn’t necessarily have to check all of these boxes. A borrower with just one of these compensating factors could potentially qualify for a VA loan, even if their residual income falls below the guidelines mentioned earlier.

Also keep in mind that residual income is just one of several guidelines and requirements for a VA-backed mortgage loan. When applying for this program, you will also need to provide a variety of documents such as the Certificate of Eligibility (COE), bank statements, tax returns, and other financial information.

Even so, the benefits of this program can far outweigh the administrative and document-related hurdles you have to clear. When using a VA loan to buy a house, you can finance the entire purchase price without having to pay for mortgage insurance.

You won’t find another mortgage product or program that offers the many overlapping benefits provided by a VA loan.

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