VA Loans: Residual Income
VA Residual Income
VA residual income is the discretionary income which remains after a homeowner has fulfilled all of his or her monthly credit obligations. In order to get mortgage-approved, the Department of Veterans Affairs requires VA mortgage applicants to show a minimum VA residual income based on their geography and household size.
Low Foreclosure Rates For VA-Backed Loans
The housing market is rebuilding with first-time buyers playing an outsized role in its rebirth. This is, in part, because home ownership costs are lower than rental expenses in many U.S. cities.
It’s also because of low- and no-down-payment mortgage programs.
One such “zero-down” program is the VA loan from the Department of Veterans Affairs.
Available to veterans and members of the military, VA home loans give military buyers the ability to finance 100% of a home at low VA mortgage rates. Unlike other 100% financing programs, though, VA loans default at a very low rate.
The key is a common sense guideline known as “residual income”.
Residual Income: Helping VA Borrowers Avoid Foreclosure
The VA mortgage program allows for $0 down. It’s among the program’s most popular features.
However, despite few VA borrowers having “skin in the game”, VA mortgages default at the lowest rate of all major lending options — including prime loans made via Fannie Mae and Freddie Mac.
The Department of Veterans Affairs requirement for “residual income” is a big reason why.
Residual income is the monthly household income which remains after a homeowner has made monthly payments to on all of his credit accounts. This includes the mortgage and escrows, of course, as well as whatever student loans, car payments, credit card bills and whatever other obligations exist.
Residual income is sometimes called “discretionary income”.
The Department of Veterans Affairs will not back a loan if military borrowers don’t meet or exceed a minimum residual income threshold which varies by individual family size, and by the cost of living by geography.
As an example of how residual income works, a family of two in Florida using a VA loan must have at least $738 in residual income monthly. By contrast, a family of five in California using a VA loan must show $1,158 in residual income monthly.
Without the requisite residual income, the VA loan cannot be approved.
By enforcing residual income requirements, the VA increases the chances of its borrowers earning sufficient income to meet all financial obligations, and to have a cushion in the event of a crisis.
VA Mortgages : Minimum Residual Income
Depending on where you live and the size of your household, your VA residual income requirements will vary. The following values are updated and accurate as of 2019. Since Carlson Mortgage specializes and only operates in Missouri – we are going to list Midwest values only. They all assume a loan size of at least $80,000.
Midwest Region VA Residual Income Tables
For Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, and Wisconsin, the VA residual income tables are as follows :
- Family size of 1 : $441
- Family size of 2 : $738
- Family size of 3 : $889
- Family size of 4 : $1,003
- Family size of 5 : $1,039
- For each additional family member, add $80 up to a family of 7
Residual Income Can Overcome High DTI
An important part of mortgage underwriting is a borrower’s debt-to-income (DTI) ratio, the percentage of monthly debt as compared to monthly income. Applicants with low debt-to-income ratios are considered less risk than applicants with high debt-to-income ratios.
A low debt-to-income ratio is 20% or less. A high debt-to-income ratio is anything over 40%. Different mortgage programs enforce different debt-to-income cut-offs but evaluating an applicant’s DTI is nearly always considered the keystone of a sound underwriting process.
The Department of Veterans Affairs mortgage guidelines state that 41% is the maximum debt-to-income ratio for a military mortgage borrower. However, because of residual income, applicants whose DTI exceed 41% can be granted an exception. Our lenders’ underwriters can go up to 50% or higher, on a case-by-case.
For applicants whose residual income exceeds the VA’s minimum residual income guidelines by 20% or more, debt-to-income ratios can be a non-factor.
A VA loan borrower in St. Louis, then (or anywhere in Missouri), with a family of 4 and a high DTI would need to show residual income of $1,204, which would satisfy the VA and its underwriters. The standard family-of-four residual income guideline for Ohio is $1,003.
Apply for a VA Mortgage
The Department of Veterans Affairs residual income requirement is imperfect. Veterans with solid credit, but diminished incomes, may find it difficult to secure a mortgage. However, along VA’s stringent appraisal process and the agency’s commitment to helping veterans avoid foreclosure, residual income standards make for good policy.
VA mortgage rates remain low nationwide. If you’re a veteran or active member of the military, see what a VA loan can do for you. Please see our contact information down below to get a rate quote from one of our loan officers.
Posted by: Carlson Mortgage – a top-rated St. Louis mortgage broker providing home loans in the state of Missouri. We are routinely ranked as a #1 mortgage broker in Missouri on Yelp, Google and Zillow. We can be reached at (314) 329-7314 seven days a week.
Our loan application can be found here or you can call us at 314-329-7314 to speak with one of our mortgage loan officers. Also, here is our pre-approval page, if you are looking to buy a home or need a referral to a top real estate agent.
Let us be your source for some of the lowest mortgage interest rates in St. Louis on first-time home buyer, conventional, FHA, Veterans (VA), Jumbo and condominium (condo) financing. Since 2004, we’ve been providing home loans and mortgage services in St. Louis that are tailored individually to your unique needs and to your financial situation. Our loan officers speak English, Spanish and Russian. Call us today to inquire about home loan interest rates, to get pre-approved for a purchase or a refinance mortgage, or if you have any general mortgage lending questions.