The VA Residual Income Chart: A Complete Guide for Veterans

The VA Residual Income Chart. The Residual Chart is a vital tool for veterans looking to secure a VA loan, as it helps to determine if they meet the financial requirements to qualify. Unlike traditional loan qualifications, which often focus solely on debt-to-income (DTI) ratios, VA loans incorporate a residual income standard to ensure veterans can comfortably manage their mortgage alongside other expenses. This article breaks down what the VA Residual Income Chart is, how it works, why it matters, and how veterans can use it to better understand their financial eligibility for a VA loan.

What is the VA Residual Income Chart?

The VA Income Chart is a guideline set by the U.S. Department of Veterans Affairs that lenders use to determine the amount of residual income (or “discretionary income”) a borrower should have after all major expenses are paid. Residual income is calculated after deducting essential monthly obligations from the borrower’s gross monthly income.

The chart considers various factors, including:

• The borrower’s family size
• The geographical region where they live
• The total monthly debts and obligations

The purpose of the VA Residual Income Chart is to ensure that veterans have enough income left over each month to cover their basic needs, even after paying for their mortgage and other necessary expenses.

How Does the VA Residual Income Requirement Work?

The VA Residual Income Requirement is different from the traditional debt-to-income ratio, as it takes into account the cost of living and family size, which allows a more holistic view of a borrower’s financial health. The Department of Veterans Affairs has created regional charts that set a minimum required residual income amount based on:

• Family size: The number of dependents a borrower has
• Region: Living costs vary across the country, so the VA breaks down residual income standards into four regions (Northeast, Midwest, South, and West).

The goal of this requirement is to prevent veterans from taking on loans they cannot afford, helping them to maintain a good quality of life.

VA Residual Income Chart Breakdown by Region and Family Size

Here’s an example of the residual income requirements based on the VA’s guidelines. Note that these amounts are subject to change based on economic factors and are updated periodically by the VA.

Explanation of the VA Residual Income Chart

• Family Size: As the family size increases, the required residual income also rises to account for the higher cost of living with more dependents.
• Regional Differences: The chart reflects the cost of living differences across regions. For example, the West generally has a higher cost of living, so the residual income requirement is higher for that region.
• Additional Family Members: For families with more than five members, the VA typically adds $80 per additional person to the residual income requirement.

How to Calculate Residual Income

Understanding how to calculate your residual income is essential if you’re applying for a VA loan. Here’s a step-by-step guide:

1. Start with Gross Monthly Income: Calculate your total monthly income before taxes.
2. Deduct Monthly Expenses: These expenses typically include:
   • Monthly debt obligations (e.g., car payments, credit cards, and student loans)
   • Estimated utility costs
   • Estimated maintenance costs (such as HOA fees, if applicable)
   • Other significant monthly expenses, including childcare, if applicable
3. Compare with Required Residual Income: After deducting expenses, compare your remaining income to the required amount on the VA Residual Income Chart for your region and family size.

If your calculated residual income meets or exceeds the minimum requirement on the chart, you pass the residual income requirement for a VA loan. If it doesn’t, you may need to adjust your debt obligations or consider a lower loan amount.

Why the VA Residual Chart Matters

The VA Residual Income Chart helps protect veterans from financial strain by ensuring they have sufficient funds for daily living expenses after paying for their mortgage. Here are a few reasons why it’s so important:

• Promotes Financial Stability: By ensuring veterans have adequate discretionary income, the VA reduces the risk of borrowers falling into financial hardship.
• Prevents Loan Default: Adequate residual income has been linked to lower default rates, which helps veterans keep their homes and prevents them from becoming over-leveraged.
• Encourages Responsible Borrowing: The chart provides a realistic view of what veterans can comfortably afford based on their unique circumstances.

In this way, the VA Residual Income Chart not only benefits veterans but also contributes to a more stable housing market.

Tips for Meeting the VA Residual Income Requirement

If you find that your residual income is slightly below the requirement, there are some practical steps you can take to meet the criteria:

1. Reduce Debt Obligations: Paying down high-interest debts, such as credit cards, can free up more monthly income.
2. Increase Monthly Income: Consider finding additional sources of income, like part-time work or freelance opportunities, if possible.
3. Lower the Loan Amount: Opting for a more affordable property or making a larger down payment can help reduce monthly mortgage expenses, thereby increasing residual income.
4. Budget Management: Track your spending to reduce unnecessary expenses and improve your monthly savings.

How VA Residual Income Differs from the Debt-to-Income Ratio (DTI)

Although both the DTI ratio and residual income aim to assess a borrower’s financial stability, they differ in several ways:

• Focus on Discretionary Income: While DTI measures the percentage of income used to pay debts, residual income focuses on what’s left after covering major expenses, taking into account living costs and family size.
• Better Predictor of Financial Health: Research shows that residual income is a better predictor of loan default rates because it directly reflects a borrower’s ability to manage daily living expenses alongside their mortgage.
• More Inclusive for Veterans: Unlike DTI, the residual income standard takes into account unique factors like geographic location and household size, which can better reflect a veteran’s financial situation.

Because of these differences, many lenders consider residual income a more holistic measure of financial capacity, especially for veterans who might have different financial priorities or dependents.

Final Thoughts on the VA Residual Chart

The VA Residual Income Chart is a valuable tool for veterans navigating the home-buying process. By ensuring veterans have adequate income to cover both their mortgage and essential living expenses, it promotes financial stability and long-term homeownership success. Understanding the chart and how residual income is calculated can help veterans and their families make informed decisions about borrowing and avoid overextending their finances.

Veterans who are proactive about meeting the residual income requirement, managing debt, and budgeting wisely are in a strong position to secure a VA loan and enjoy the benefits of homeownership without undue financial stress. For veterans considering a VA loan, consulting the residual income chart early in the process can be a crucial step in setting realistic expectations and ensuring a smooth loan approval process.

References

• U.S. Department of Veterans Affairs. (2023). VA Loan Residual Income Requirements. Retrieved from https://benefits.va.gov/
• Veteran.com. (2023). What Is VA Residual Income? Retrieved from https://www.veteran.com/
• Investopedia. (2023). Understanding the VA Residual Income Chart and Requirements. Retrieved from https://www.investopedia.com/
• Military.com. (2023). VA Loan Basics: Debt-to-Income Ratio and Residual Income. Retrieved from https://www.military.com/

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