VA’s Residual Income Requirement Protects Veterans

In determining the applicants ability to repay, nearly all mortgage programs utilize two ratios: the housing payment ratio and the debt-to-income ratio. The Veterans Administration requires mortgage underwriters to consider these two ratios as well, but another, little-known rule is less concerned with percentages and more concerned that veterans have actual money left over to pay for other necessities.

Known as residual income, the calculation subtracts several things that the other ratios do not directly account for, such as payroll deductions for income taxes, social security taxes, medical and dental insurance, and childcare expenses. This provides a more realistic picture of what the veteran’s actual financial situation will look like with the proposed mortgage payment and help avoid a situation where that veteran is “house poor.”

Residual income, arguably, offers a much more realistic picture of affordability than the traditional ratios. The acceptable ratios have remained fairly constant for many, many years despite significant changes in the economic environment, such as wages staying about the same while many everyday costs of food, healthcare, and other necessities has increased.

Also, active-duty military members typically have certain types of untaxed income “grossed up” when calculating ratios. The premise behind grossing up the income is that the ratios are accounting for taxes, so the untaxed income is actually more valuable. This is technically true, but that doesn’t equate to actually having more money to spend.

In short, the ratios are simple calculations with formulas that make a number of assumptions whereas residual income looks at the situation in terms of actual numbers to determine how much money the veteran will have left to support themselves and, if applicable, their family. The remaining residual income is then compared to a chart in the VA mortgage guidelines to determine if that remaining income is sufficient for loan approval:

Table of VA Residual Income by Region
For 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 $967
5 $921 $902 $902 $1,004
Over 5 Add $75 for each additional member up to a family of 7.

 

Table of VA Residual Income by Region
For 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
Over 5 Add $80 for each additional member up to a family of 7.

While the residual income requirement may seem like just another burden that must be overcome to qualify and get approved for a VA home loan, it is, in fact, a critical protection for the veteran. VA loans have traditionally had the lowest foreclosure rate of any other type of mortgage and the residual income requirement is credited as one of the key reasons for the sustained success of veteran homebuyers.

If you are interested in learning more about your VA entitlement and the VA home loan benefit, do not hesitate to contact me at your convenience. It is my honor to help our nation’s heroes achieve their financial objectives.