What Is Residual Income?
Residual Income: The money a VA borrower has left each month after major expenses, compared to a regional standard.
Residual income is a VA loan test that measures how much money is left each month after taxes, the new housing payment, other debts and estimated maintenance and utilities.
How it works
The lender subtracts federal, state and Social Security taxes, the mortgage payment, other monthly debts, and maintenance and utilities (based on square footage) from your gross income. The result must meet a VA table that depends on:
- Family size
- Region of the country (Northeast, Midwest, South or West)
- Loan amount (under or over $80,000)
Why it matters
Residual income lets VA approve some borrowers with a debt-to-income ratio above the 41% guideline. If residual income exceeds the requirement by 20% or more, a higher DTI can be acceptable.
Good to know
Larger households need more residual income, so a VA borrower with several dependents may qualify for a smaller payment than the same income would allow on another program.