What is Residual Income?
The VA home loan program actually has some of the lowest foreclosure rates than any other loan program for about six years straight. The reason for this is because of its income standard that ensures veterans can afford a new mortgage. This income standard is called residual income.
What is Residual Income?
Residual income is something that is only applied to a VA home loan. Residual income is basically the amount of money you will have left over each month after all of your other major expenses have been paid.
Borrowers looking to apply for a VA home loan must meet the minimum amount of residual income. This is ultimately decided by the amount of people living in the household, the amount of dependence that you have and the square footage of the property that you’re buying. All of these factors are then calculated to determine the dollar amount you’ll have left after you’ve paid your normal monthly expenses- your residual income.
Basic Break Down of Residual Income
Here is the break down for residual income:
For example, a family of three in Columbia, Missouri would have to have at least $889 in residual income in order to qualify for a VA home loan. You may also be able to exempt any self-sufficient dependents from the residual equation to lower your requirement. VA Loan Spot will also consider the square footage of your home when calculating your residual income.
Residual Income and DTI Ratio
Residual income and your debt-to-income ratio are actually linked. VA lenders pay special attention to your debt-to-income ratio which is all of your monthly debt payments divided by your gross monthly income. Both residual and DTI are set to better understand if you are able to pay for a new mortgage.
Here is an easy way to calculate your DTI by yourself:
- Determine your annual income ($48,000)
- Divide your annual income by 12 to get your monthly income ($48,000/12= $4,000)
- Multiply your monthly income by 0.41 ($4,000 x 0.41= $1,640)
- If your monthly debt obligation is less than this final amount ($1,640) you are eligible to qualify for a VA home loan
When VA Loan Spot officially calculates your DTI, the acceptable percentage is usually around 41%, especially for VA jumbo loans. If your DTI is any higher, other factors will come into play, but generally a low DTI is best. If a borrower’s debt-to-income ratio is above 41 percent, the residual income requirement increases by 20 percent. If the family of three mentioned earlier were to have a DTI ratio of 45, their new residual income would be about $1,067.
If you are considering applying for a VA home loan, call VA Loan Spot. Our home loan experts can assist you in determining your residual income, debt-to-income ratio and much more. Get the home loan you deserve with VA Loan Spot!
