Can I Afford a VA Loan and Maintain My Lifestyle?
Buying a home with a VA loan begs the question: will I still be able to do the things I love? Residual income, just one factor in the overall VA loan qualifying equation, could provide the answer.
The VA requires lenders to consider a borrower’s residual income before approving loans. In this article, you will learn about residual income and how it can be useful in determining whether you can own a home and maintain your lifestyle.
You can expect your lender to verify that you have enough income left over, after all your monthly obligations, to support your family. Whether that’s paying for your kid’s sports equipment, or treating yourself to weekend gourmet coffee with friends, your family expenses are your business.
If you’re looking to use your earned home loan benefit, read on to learn about this interesting part of VA loan qualifying.
What Is Residual Income?
Residual income is discretionary money remaining for living expenses after paying your mortgage and other expected obligations. When it comes time to show your VA-approved lender your qualifying credentials, they’ll calculate your residual income. They’re looking for whether you’ll have enough money to support your family and live your life.
What Expenses Are Considered for Residual Income Calculations?
The VA asks lenders to verify that borrowers have enough money for four major expenses:
- Mortgage payment
- Shelter expenses (such as utilities)
- Debts and obligations
- Family living expenses
When a lender does the residual income analysis, it’s that fourth bullet “family living expenses” that is computed. Lenders use simple math to calculate this. They add up your new mortgage payment plus shelter expenses, and debts. Then they subtract the total from your verified income.
The balance is money for you and your family. The VA refers to residual income as “family support” money. And, it’s an important consideration for VA-approved lenders when determining a loan amount that’s manageable for you.
How Do Alimony and Child Care Factor In?
Here’s a more in-depth look at which monthly expenses fall where when tallying your residual income – including alimony, current debts, and child care:
- Housing expenses
- Mortgage principal and interest
- Property taxes
- Homeowners insurance
- HOA dues
- Debts and obligations
- Car loan(s)
- Credit card(s)
- Installment loan(s)
- Alimony and/or child support
- Child care expenses
- Maintenance and utilities
- Taxes
- Federal income tax
- State income tax
- Social security
- Union dues
How Much Residual Income Do I Need?
The amount of residual income a borrower needs varies by region, loan amount and family size. The VA provides lenders with a prequal worksheet and a residual income chart to use as a guideline.
For loans of $79,999 or less, this is the aim for residual income:
| 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 seven. |
Source: https://bit.ly/3A2Q5o9
For loans of $80,000 or more, this is what the VA likes to see:
| 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 seven. |
Source: https://bit.ly/3A2Q5o9
Active duty servicemembers may be eligible for a 5% reduction in their residual income requirements for a VA loan. This reduction applies when the service member or their spouse can use military facilities near the property. The VA makes this reduction to ensure that their financial assessments are accurate and fair.
As mentioned, residual income is the amount of money left over after you’ve paid for major expenses — housing, taxes, and debt. It's used to determine if a borrower can afford to make mortgage payments and living expenses.
What If I Have More or Less Than Enough Residual Income?
Many people are wise to choose a home that’s well within their budget. Leaving yourself excess residual income can mean an extra shot of espresso in your cappuccino. If you have more residual income than what the VA requires on the chart, it can also help fill gaps in other areas of your loan application.
For instance, an abundance of residual income can be used to offset a shortcoming in your debt-to-income (DTI) ratio —another component of VA loan qualifying. The VA likes to see a DTI of 41% or better. But if you have a DTI that’s slightly higher, it’s possible to make up for it with excess residual income.
On the flip side, if your residual income is marginal, other compensating factors, such as your credit history and in particular, how you’ve handled similar housing expenses, can help offset a residual income.
Keep in mind that while inadequate residual income alone can be a basis for disapproval, you might still be considered for approval as long as certain other areas of your application are strong.
Of course, VA loan qualifying requires a complete credit history and FICO scores as well as income and debt analysis. See if you qualify by talking to one of our loan experts today!
