VA residual income is the discretionary income leftover each month after paying all major expenses, including the mortgage payment. Residual income requirements vary by location, loan amount and family size.
The heart of this requirement is discretionary income. Residual income looks at how much money you have leftover each month after paying all expected expenses, like loans, child care, utilities and more. The VA wants to know that Veterans have enough residual income to cover things like gas, food, clothing and other typical family needs after the mortgage payment.
Getting approved for a VA loan requires meeting the U.S. Department of Veterans Affairs (VA) residual income guidelines. Residual income refers to the income left over after paying all your monthly debts and living expenses.
The VA wants to ensure veterans have enough discretionary income to cover daily necessities like food, gas, clothing, and other expenses after making the mortgage payment. That’s why residual income is a key factor in determining if you can afford a VA mortgage.
In this comprehensive guide we’ll explain everything you need to know about calculating residual income for VA loans including
- What is residual income and why it matters for VA loans
- VA residual income charts by region and family size
- Step-by-step instructions for calculating your residual income
- Tips for improving your residual income if it falls short
- The relationship between residual income and DTI for VA loans
- What to do if you can’t meet the VA residual income requirements
What Is Residual Income?
Residual income refers to the net income you have left each month after paying all monthly debts, obligations, and living expenses.
It’s calculated by taking your total gross monthly income and subtracting out:
- Monthly debt payments like car loans, student loans, credit cards, etc.
- Other monthly financial obligations such as child support or alimony
- Estimated living expenses like utilities, groceries, gas, childcare, etc.
The income “left over” after these deductions is your residual income.
Why Residual Income Matters for VA Loans
Residual income gives mortgage lenders a more complete picture of your financial situation beyond just your debt-to-income ratio (DTI).
While DTI looks at your monthly debts compared to income, residual income shows how much money you’ll have available to cover basic living costs after making the mortgage payment
That’s why the VA uses residual income as an additional guideline for affordability. They want to ensure veterans have enough discretionary funds to pay for necessities like food, clothing, transportation, and healthcare after the mortgage payment.
Minimum residual income guidelines vary based on family size and geographic region. We’ll take a closer look at the charts in the next section.
VA Residual Income Charts
The VA provides baseline residual income requirements that vary by:
- Number of family members
- Loan amount
- Geographic region
They break the country down into four regions: Northeast, Midwest, South, and West.
Here are the residual income charts for both loan amounts under and over $80,000.
VA Residual Income Chart for Loans Under $80,000
<table> <tr> <td>Family Size</td> <td>Northeast</td> <td>Midwest</td> <td>South</td> <td>West</td> </tr> <tr> <td>1</td> <td>$390</td> <td>$382</td> <td>$382</td> <td>$425</td> </tr> <tr> <td>2</td> <td>$654</td> <td>$641</td> <td>$641</td> <td>$713</td> </tr> <tr> <td>3</td> <td>$788</td> <td>$772</td> <td>$772</td> <td>$859</td> </tr> <tr> <td>4</td> <td>$888</td> <td>$868</td> <td>$868</td> <td>$976</td> </tr> <tr> <td>5</td> <td>$921</td> <td>$902</td> <td>$902</td> <td>$1,004</td> </tr></table>
*For families over 5, add $75 for each additional member up to 7.
VA Residual Income Chart for Loans Over $80,000
<table> <tr> <td>Family Size</td> <td>Northeast</td> <td>Midwest</td> <td>South</td> <td>West</td> </tr> <tr> <td>1</td> <td>$450</td> <td>$441</td> <td>$441</td> <td>$491</td> </tr> <tr> <td>2</td> <td>$755</td> <td>$738</td> <td>$738</td> <td>$823</td> </tr> <tr> <td>3</td> <td>$909</td> <td>$889</td> <td>$889</td> <td>$990</td> </tr> <tr> <td>4</td> <td>$1,025</td> <td>$1,003</td> <td>$1,003</td> <td>$1,117</td> </tr> <tr> <td>5</td> <td>$1,062</td> <td>$1,039</td> <td>$1,039</td> <td>$1,158</td> </tr> </table>
*For families over 5, add $80 for each additional member up to 7.
The VA instructs lenders to count all members of the household, including dependents like children from a previous marriage who the borrower supports financially.
Now that you know the baseline residual income requirements, let’s go through the step-by-step process for calculating your own residual income.
How to Calculate Residual Income for a VA Loan
Follow these 6 steps to calculate your residual income when applying for a VA mortgage:
1. Document Your Gross Monthly Income
Your gross monthly income includes income from all sources before any deductions are taken out:
- Employment income
- Self-employment income
- Social security
- Disability payments
- Alimony/child support
- Military allowances
- Any other income sources
Add up the totals from each income stream to get your total gross monthly income.
2. List Your Monthly Debt Payments
Make a list of all your monthly debt payments and financial obligations, including:
- Car loans
- Student loans
- Credit card payments
- Personal loans
- Child support/alimony
- Any other monthly debts
3. Estimate Your Living Expenses
The VA requires lenders to estimate monthly living expenses using these guidelines:
-
Mortgage payment – Estimate your expected monthly mortgage payment for the new loan.
-
Utilities – Multiply the home’s square footage by 0.14% to estimate utilities. For example, a 2,000 sq ft home would be 2,000 x 0.14% = $280.
-
Taxes/insurance – Your lender will estimate taxes and insurance.
-
HOA fees – If applicable.
-
Childcare – Average monthly childcare costs.
-
Medical expenses – Uncovered out-of-pocket medical expenses.
-
Car fuel/maintenance – Estimate your monthly costs for gas, oil changes, repairs.
-
Food – Groceries and dining out costs.
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Public transportation – Bus fare, subway cards, etc.
-
Entertainment – Cable TV, streaming services, gym membership, etc.
Make your best estimate for costs in each category. The lender may ask for clarification or documentation on any living expenses that seem unusually high or low.
4. Total Monthly Debts and Living Expenses
Add up all the monthly debts and living expenses from Steps 2 and 3.
5. Subtract Debts/Expenses from Gross Income
Take your total gross monthly income from Step 1 and subtract the sum of monthly debts and living expenses from Step 4.
The remainder is your residual income.
6. Compare to VA Residual Income Tables
Look up the minimum residual income requirement for your region, loan amount bracket, and family size on the VA charts.
Your calculated residual income must meet or exceed the VA guidelines. If it falls short, we’ll discuss some options to improve your residual income in the next section.
Tips for Improving Residual Income
Here are some tips if your calculated residual income doesn’t meet the VA guidelines:
-
Lower your home buying budget – Opting for a less expensive home will lower your estimated mortgage payment and improve residual income.
-
Reduce monthly debts – Pay down debts before applying to improve your residual income.
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Increase your down payment – This lowers the mortgage amount, which results in a lower monthly payment and higher residual income.
-
Lower living expenses – Reduce utility or food costs by being more frugal.
Calculating Residual Income for VA Loans
The VA residual income guidelines consider only significant monthly obligations. Lenders arent going to hunt through your bank statements to determine how much you spend on small-ticket items.
Remember, your new mortgage payment will be a key component of the residual income calculation.
Heres an example calculation of residual income. In our example, well assume the Veteran makes $5,000 a month and has the following expenses:
| Income Variable | Calculation |
|---|---|
| Gross monthly income | =$5,000 |
| Installment loans (ex: auto & student loans) | -$800 |
| Revolving loans (ex: credit cards) | -$100 |
| Child care/child support/alimony | -$300 |
| Full monthly mortgage payment | -$1,200 |
| Estimated utility costs | -$280 |
| Estimated residual income | =$2,200 |
VA lenders will multiply the homes square footage by 0.14 percent to estimate monthly utility costs. In our example, the $280 comes from the estimating utilities for a 2,000-square-foot home (2,000 x 0.14 = $280).
Lenders can pull most of these monthly expenses directly from your credit report. They may inquire about others in order to obtain the best estimate possible.
Residual Income and DTI Ratio
Residual income and debt-to-income ratio are interconnected financial guidelines for VA lenders. VA encourages lenders to put more weight on residual income than DTI ratio, and prospective borrowers with higher debt ratios will typically need to meet a higher standard for residual income.
At Veterans United, all borrowers with a DTI ratio above 41 percent must have enough residual income to exceed their guideline by 20 percent.
For example, a family of four in the Midwest would typically need $1,003 in residual income. But if their DTI ratio is higher than 41 percent, they’ll need at least $1,204 in residual income each month.
Prospective VA buyers who have income streams within the household that aren’t being considered for loan qualification may be able to use that money to lighten their residual income guideline.
Lenders may be willing to remove family members from the residual calculations if a non-purchasing spouse or a working-age child has sufficient income to cover their monthly debts. This can include children who receive Social Security or disability income, child support and other forms of income, provided it’s likely to continue for at least three years.
It’s possible for a non-purchasing spouse’s income to offset any children living in the home for residual income purposes.
Here’s a general example of how this can work.
Let’s say our same Midwestern family of four is buying a $200,000 home. Normally, they would need at least $1,003 in residual income. But if the non-purchasing spouse has enough monthly income to cover their debts and the difference in residual income, lenders can treat this family of four as a family of three for residual income purposes.
In this example, the non-purchasing spouse would need at least $114 leftover each month after paying debts. That’s the difference between the residual requirement for a family of four ($1,003) and the requirement for a family of three ($889).
Guidelines and policies on residual income offsets can vary by lender. Veterans United does allow for residual offsets for eligible borrowers.
How to calculate VA Residual Income
FAQ
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