Most people in the mortgage process hear the term debt to income ratio thrown around a lot and know its importance. However, when it comes to VA loans, many are not familiar with the VA residual income chart guidelines. Actually VA residual income is more important than debt ratio because it shows how much is left for basic living expenses. Chapter 4: Credit Underwriting of the VA Handbook states, “Residual income is the amount of net income remaining (after deduction of debts and obligations and monthly shelter expenses) to cover family living expenses such as food, health care, clothing, and gasoline.” Therefor, in the background, VA loan underwriters are using this calculation to determine your ability to make your VA loan monthly payment and other expenses. Having a good number can play a huge role in VA loan approvals and can even turn a denial into an approval!
VA Residual Income Chart Requirements
Now we know what residual income is comprised of, but there is not one required number. Actually, there are 3 factors used in the minimum VA residual income. These figures are derived from Department of Labor’s Bureau of Labor Statistics’ report called the Consumer Expenditures Survey.
3 Residual Income Factors
- Loan Size
- Family Size
- Region of the Country
By looking at the charts below, notice that one is for VA loans under $80,000 and the other is for $80,000 and above. Then, each chart is broken down by family size and where the family lives.
Not sure which region you are located? Check out the chart below which lists which states are in each region.
Using VA Residual Income as a Compensating Factor for Loan Approval
There are all kinds of factors used in mortgage loan approvals. Whether it is a software program or a human underwriter, there’s some serious calculations going on. Basically, these are weighing the risks versus benefits of giving the loan. For instance, higher debt to income ratios, low credit scores, no assets, and prior foreclosures are considered risks. Although high credit scores, low debt ratios, low payment shock, and high residual income are considered compensating factors. This is especially true when it comes to a VA loan manual underwrite.
Manually underwritten VA loans are required when an automated approval is not available. These guidelines are traditionally more conservative than automated guidelines. While underwriters are considering qualification, having as many benefits or compensating factors possible could sway the reviewer to an approval. One of the key factors, actually requirement, is that the borrower(s) meet the VA residual income chart. Better yet, exceeding the minimum VA residual income by 120% is considered a major compensating factor. In the end, it could turn a denial into a VA loan approval.