Understanding VA Loans and Residual Income

VA loans are approved in much the same manner as any other loan program. A lender (like Sente Mortgage) reviews the veterans’ credit, documents income and employment, and evaluates the selected property. The documented loan is sent through an electronic loan approval system called an Automated Underwriting System, or AUS, which quickly provides an approval along with a list of required documentation. But VA loans have another requirement that other loans do not have – residual income calculations.

While few loans are turned down due to low residual income, calculating this amount is something that all VA lenders must do as the loan application is being processed. Residual income is an amount that is left over each month after paying monthly bills and expenses. One of the reasons VA loans have the lowest default rate of any loan program on the market is due to the residual income requirement. Lenders want to make sure a veteran not only has enough money for the house payment and credit obligations, but also for everything else such as food, gas and everyday expenses.

Residual income requirements are based upon the number living in the household and by region. The four regions are the Northeast, Midwest, South and West. Lenders have a matrix they refer to when looking up minimum residual income requirements. Below are the minimum residual income requirements for VA loan amounts of $80,000 and higher:

 

Residual Income by Region Loan Amounts >$80,000 and above
House Hold 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	$1062	$1,039	$1,039	$1,158
> 5	Add $80 for each additional member up to seven

 

When applying for a VA loan it’s very likely you won’t even be aware that residual income is being calculated.  It’s important to note that this will only be a factor if the minimum residual income amount isn’t met.   If the standard isn’t met, the veteran can reduce other debt or choose to borrow a lower amount.  Consulting with an experienced lender can help make the choice of which strategy is best.

Want to learn more? Visit our VA loans page or give us a call today.