Understanding VA Loan Residual Income Requirements: A Step-by-Step Guide to Using the VA Residual Income Calculator

Getting a VA loan to buy your dream home can be an exciting prospect With no down payment required and other advantages, VA loans help many veterans and military families realize the dream of homeownership.

However, qualifying for a VA loan isn’t just about your credit score and debt-to-income ratio. The Department of Veterans Affairs also wants to ensure you have enough residual income to cover your living expenses and mortgage after purchasing a home.

That’s where the VA residual income calculator comes in This helpful tool allows you to estimate your residual income based on your family size, income, debts, and the local housing costs where you want to buy

In this comprehensive guide, we’ll explain everything you need to know about VA residual income requirements. You’ll also learn how to use the VA residual income calculator to improve your chances of mortgage approval.

What Is Residual Income and Why Does It Matter?

Let’s start with the basics. Residual income is defined as the net income you have left each month after paying your bills and other financial obligations.

To calculate your residual income:

Gross Monthly Income

• Federal, State, and Local Taxes
• Mortgage Payment
• Insurance
• Credit Card Payments
• Car Loans
• Student Loans
• Child Support/Alimony
• Child Care
• Utilities
• Food
• Gas
• And Any Other Monthly Expenses

= Residual Income

So in simple terms, residual income is your disposable income after covering all your monthly expenses.

This remaining income is intended to cover additional living expenses like clothing, medical copays, home maintenance, entertainment, and savings contributions.

Residual income gives the VA a realistic snapshot of how much money borrowers will have leftover each month after making the mortgage payment. If your residual income is too low, it raises concerns about your ability to afford homeownership long-term.

Overview of VA Residual Income Requirements

The VA provides residual income guidelines lenders must follow to qualify borrowers for a VA-backed mortgage. The requirements vary based on:

• Location of the home
• VA loan amount
• Number of dependents

The VA has established different residual income standards for four regions: Northeast, Midwest, South, and West. Requirements are highest for the West and Northeast where the cost of living tends to be higher.

Additionally, the VA requires more residual income on loans above $80,000 compared to smaller mortgages below $80k.

Finally, residual income scales up based on family size, with larger households needing more income compared to single borrowers.

Later in this guide, we’ll break down the specific VA residual income charts. But first, let’s walk through how to use the VA residual income calculator.

How to Use the VA Residual Income Calculator

The VA residual income calculator allows you to plug in your personal financial details to determine if you meet the VA’s guidelines. With this tool, you can get an early idea of whether residual income will impact your VA loan eligibility.

Let’s look at how to use the calculator in 6 simple steps:

Step 1) Enter your gross monthly household income before taxes and deductions. For most borrowers, this will be your pre-tax salary plus any additional income like bonuses, rental income, or Social Security.

Step 2) Input your estimated federal, state, and local tax burden. Your bank statements or pay stubs can help you determine an accurate estimate.

Step 3) Enter your expected monthly mortgage payment including principal, interest, taxes, and insurance. Get a mortgage estimate to determine this number more precisely.

Step 4) List any other monthly obligations like credit cards, auto, and student loans. Don’t forget regular expenses like child support and alimony payments.

Step 5) Account for monthly utilities, child care, commuting costs, and other living expenses. The VA uses a standard estimate of 14% of your home’s value for utilities.

Step 6) Based on the inputs, the calculator will determine your residual income. Compare this to the VA’s published requirements for your region and family size.

If your residual income meets or exceeds the requirements, you’re on the right track for VA approval. If it falls short, you may need to reduce debts or reconsider your homebuying budget.

Let’s look at a quick example:

John and Jane are a married couple with one child looking to buy a $300,000 home in the Midwest.

• Their gross monthly income is $7,500
• Estimated taxes are $1,900
• Expected mortgage payment is $1,800
• Other debts total $700
• Child care and utilities equal $940
• Residual income = $7,500 – $1,900 – $1,800 – $700 – $940 = $2,160

Based on their family of three in the Midwest, John and Jane need $889 in minimum residual income. Their calculated income of $2,160 exceeds the requirements, meaning residual income is not an obstacle for their VA loan eligibility.

Now that you understand the basics of using the calculator, let’s take a look at the VA’s specific residual income charts.

VA Residual Income Charts by Region and Loan Size

The VA residual income calculator helps you estimate your residual income. To qualify for a VA loan, you’ll need to meet or exceed the VA’s thresholds in the following charts:

Residual Income Requirements for Loan Amounts Under $80,000

*Add $75 for each additional family member up to 7.

Residual Income Requirements for Loan Amounts Over $80,000

*Add $80 for each additional family member up to 7.

To qualify, your calculated residual income must meet or exceed the VA requirements for your region, loan amount, and household size.

What if You Don’t Meet the Residual Income Standards?

Falling short of the VA residual income guidelines doesn’t automatically disqualify you from getting a VA loan. But it is likely to raise concerns with underwriters unless you have compensating factors.

Here are some options if your residual income is below the VA’s standards:

1. Opt for a Smaller Loan Amount

The requirements are lower on VA mortgages under $80,000. Purchasing a more affordable home can help reduce your monthly costs and increase disposable income.

2. Increase Your Down Payment

Putting down a larger down payment reduces the loan amount, which leads to a lower required residual income.

3. Reduce Debts

Paying down credit cards, auto loans, student debt and other obligations can free up more disposable income to improve your residual income.

4. Boost Your Income

Taking on a side gig, part-time work, or getting a promotion/raise can move the needle on your residual income calculation.

5. Offset Dependents’ Expenses

If you have a working spouse or child with income, their earnings may offset dependents for residual income purposes if they can cover their own expenses.

6. Improve Compensating Factors

A good credit score, substantial cash reserves, or moderate debt-to-income ratio can sometimes offset lower residual incomes.

7. Request an Exception

Lenders can request exceptions from the VA for borrowers with special circumstances who fail residual income requirements. However, exceptions are not guaranteed to be approved.

Why Residual Income Matters for Responsible Lending

On the surface, residual income requirements may seem like an unnecessary hurdle for borrowers to clear. But this guideline is integral to the VA loan program’s mission of helping veterans achieve sustainable homeownership.

The VA needs to minimize risk and ensure borrowers can actually afford the homes they purchase. Residual income provides a backstop beyond just looking at debt-to-income ratios.

It provides a more realistic assessment of how much wiggle room a household will have after the mortgage payment to manage life’s unexpected expenses.

In the long run, appropriate residual income standards benefit veterans. VA borrowers enjoy exceptionally low foreclosure rates even though most don’t make a down payment