The VA has one unique property – its income guidelines. They don’t focus on the debt ratio; instead, they focus on the VA residual income. We’ll help you understand what this is and how much you need to qualify for the loan.
Before you start, though, make sure
you are entitled to a VA loan. If you don’t have your certificate of entitlement, you’ll need it. You can contact your
local VA office to find out what you must provide to obtain the certificate. You can also let your lender obtain the certification for you.
The Income Guidelines
Residual income differs from regular income. Your regular income is what you use to pay your bills. This is the figure lenders usually use to come up with your debt ratio. They compare your gross monthly income to your total debts. They use debts that report on the credit report, such as:
- Mortgage loans
- Credit cards
- Auto loans
- Personal loans
The debt ratio doesn’t take into consideration the daily cost of living. It also doesn’t include utility bills, insurance payments, or tuition bills, as a few examples.
Residual income, on the other hand, takes all of this into consideration.
What is VA Residual Income?
VA residual income is the money you have left after you pay your bills. Here’s an example:
You have a mortgage payment of $1,000 per month. You also have a car payment of $300 and a credit card with a $50 minimum monthly payment. Your gross monthly income equals $3,000.
- Your debt ratio equals 45%
- Your residual income equals $1,650
The $1,650 is the money the VA is concerned with. They have a minimum amount of residual income that you must have to qualify for the loan. It’s the VA’s experience that borrowers with adequate residual income are less likely to default on their loans.
The VA breaks up the areas by region. There’s the Northeast, Midwest, South, and West. They also break up how much money you need by your family size. For example, a family of 4 needs more money than a family of 1.
Here’s an example of how much a family of 4 in each of the regions would need:
- Northeast – $1,025
- Midwest – $1,003
- South – $1,003
- West – $1,117
The difference isn’t huge, but it’s enough. The west has the highest requirements because they have the highest cost of living.
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Every person living in your home, including children from another marriage count for your family size. Anyone that relies on the borrower for financial support counts in the requirement.
Exceptions to the Rule
Sometimes you don’t meet the VA residual income guidelines. Maybe you are just short of the amount needed. If you have someone else in the home that works, it could help. They can’t be a co-borrower, though. It has to be someone that makes an income, but isn’t on the loan. Oftentimes, it’s a
The lender can use the spouse’s income for the residual income calculation. If the spouse makes enough money, the VA residual income requirements may decrease by one person. Here’s an example:
Joe applies for a VA loan. He just misses the residual income requirements. But, Joe’s wife works. They also have 2 kids. They live in the Midwest. Joe should need $1,003 in residual income. But, since Joe’s wife works and isn’t on the loan, as long as she can prove that she has at least $114 left over from her monthly income, they may qualify. ($1,003 (family of 4 residual income requirement) – $889 (family of 3 residual income requirement). The VA allows the lender to knock the family size down to 3, since Joe’s wife can cover her portion.
The good news is if you don’t meet the VA residual income requirements, you aren’t automatically disqualified. It may be hard to find a lender that will give you the loan, though. Without the residual income, you are looked at as higher risk. You’ll need to find a lender willing to take a risk.
Whether or not you meet the requirements, you should shop around. You’ll want to find a lender with the best rates and fees. There are many VA lenders out there. Make sure you do your homework in finding the right one for you.
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