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What is "Residual Income"?
Three Minute Read
Written by Ed Andrews III on July 29th, 2020
If you’ve spoken to someone about getting a VA loan and discussed debt to income ratio, you may have heard the term residual income thrown around. Residual income is the amount of money you have left over after your housing expenses, monthly debts, and utilities are paid.

Keep reading and I’ll show you exactly how it’s calculated and why it’s such an important factor when getting a VA loan.

Debt to income ratio is simply a measurement of how much debt you have versus how much income you have. If you haven’t seen my video on how to calculate it, be sure to check out my video on that very topic.

For most loan programs having a debt to income ratio that is too high is the difference between qualifying for a loan, and not qualifying. But for VA that’s not the case at all. While VA underwriters will take your debt to income ration into consideration, the VA puts a higher significance on your residual income.

The first step in calculating your residual income is determining what your proposed housing payment will be given the home you are attempting to purchase. This will be based on the parameters of the loan, as well as the taxes and insurance for the property. Also included in this amount is the monthly cost for any HOA dues for the property, regardless of whether they are paid monthly, bi-annually, or annually.

The following items will also be included when calculating your monthly obligations: 

Income Tax:

This is calculated by matching your income up against current IRS tax tables.

Credit Cards:

The cumulative minimum monthly payment amounts as listed on your credit report will be used.

Installment Debts:

These could be student loans, car notes, personal loans, etc.

Court Ordered Support Payments:

This could be child support, spousal support, or alimony. 

Childcare & Employment Expenses:

Lenders will inquire as to what childcare expenses the veteran has for any children under the age of 13. In addition, they will ask about in non-reimbursed work expenses (these are often listed on people’s income tax returns)

Utility Costs:

The VA uses a projection of .14 cents per square foot of home to approximate utility costs. So if a home is 2,000 square feet the proposed utility costs would be $280.
All of these items will be deducted from the total income to determine the net income remaining to support the veteran’s family. The amount required will vary based on the household size, and where in the country the veteran lives. Here’s an example of what that requirement looks like in the southern region of the United States. 

Family Size of 1 - $441
Family Size of 2 - $738
Family Size of 3 - $889
Family Size of 4 - $1,003
Family Size of 5 - $1,039
Over 5 - add $80 per family member up to 7

If you live in a different region of the country these numbers will vary (they also change), but these charts are available online to anyone interested in reviewing them. It’s important to understand who must be included in the veterans household size. All household members must be included in the household size regardless of relationship type. If a person is listed as a dependent on your tax return they must be considered a member of your household.

There are instances where a household member can be omitted. This is typically when a source of income exists to fully support the dependent that is not included in the veterans loan application.

Examples of this are a child from a spouse’s previous marriage for which adequate child support is received. Another example is a spouse who is not on the loan application, but works a full-time job and has adequate income to support themselves. You could also omit a dependent parent who has adequate income from disability, social security, and/or pension income.

It should also be noted that the residual income requirement is impacted by your debt to income ratio. The VA likes for veterans to have a debt to income ratio of 41% or lower. In the event that your debt to income ratio exceeds that, you will not be automatically disqualified from financing. Rather you will simply be required to exceed the residual income requirement for your household size by 20%.

Because of this insightful way of looking at debt and income the VA has helped lenders make home financing more available to veterans who might otherwise not qualify. I’ve closed VA loans for veterans who had debt to income ratios well into the 60s, all because they had sufficient residual income.

You might also be surprised to find that despite what some would consider a more liberal way of evaluating debt and income, VA loans historically have the lowest default rates.

Now that we understand what residual income is and the impact it can play in determining whether or not you qualify, you may be asking how do I know what my debt to income ratio is. So be sure to check out my video “how to your calculate debt to income ratio” where I’ll walk you through how lenders calculate this step by step. 
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About the Author:
Ed Andrews III

Ed Andrews III is a mortgage loan officer, and U.S. veteran of the Iraq & Afghanistan Wars. He is an expert on VA home loans, and dedicated to helping veterans achieve home-ownership.
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