Veterans Affairs (VA) Residual Income & Debt-to-Income (DTI): How Lenders Calculate What You Can Afford

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Lenders consider a variety of financial factors when deciding who qualifies for a Veterans Affairs (VA) loan. Two important pieces of that assessment are the borrower’s residual income and their debt-to-income (DTI) ratio.  

These two measurements, among others, help lenders understand whether or not the eligible veteran borrower can afford their loan. In this article, we will explain the VA residual income requirements, how residual income is calculated, how it differs from DTI, and how to improve those measurements for your future application.

Residual Income vs. DTI

Residual income, according to the VA, is the amount of net income left over to cover family expenses after subtracting debts, obligations, and monthly shelter costs. VA residual income requirements vary based on region, family size, and loan amount.  

Debt-to-income (DTI) ratio is similar, except that it measures your total monthly debt payments against your gross income. So, if you had a gross monthly income of $6,000 and monthly debts equaling $2,350, you would divide the debts by the income and get a DTI of about 39%.  

Now, VA loans are somewhat unique in that residual income takes precedence over DTI when assessing your ability to afford a loan. The VA notes that neither factor should trigger an automatic rejection of your loan application.  

However, insufficient residual income can be the basis for a loan rejection. Though you might have a lower residual income or DTI, the VA does encourage lenders to consider those factors in the context of your full financial situation.

How to Calculate Residual Income

The residual income calculation is fairly straightforward. While this takes into consideration monthly payments, it’s unlikely that certain smaller expenses would factor in here. 

To demonstrate how to calculate residual income for a VA loan, consider the following:  

• Gross Monthly Income: $6,000 

• Mortgage Payment: $2,500 

• Utilities: $250 

• Childcare: $400 

• Credit Cards: $150 

• Car Payment: $700 

First, when we add up the recurring payments, we get $4,000. Then, we subtract $4,000 from the gross income, $6,000. That gives us our estimated residual income of $2,000.

Regional & Household Size Benchmarks

Now, the VA determines its residual income requirements using data from the Consumer Expenditures Survey (CES), which is published by the Department of Labor’s Bureau of Labor Statistics. These amounts serve as guidelines for lenders when determining if a borrower’s residual income is sufficient based on the area in which they’re buying, their family size, and the requested loan amount.

Residual Incomes by Region for Loan Amounts of $79,999 and Below

For families larger than five, the VA says to add $75 up to a family of seven. When considering your family size, be sure to include all dependents and your spouse, if applicable.  

However, you may leave out anyone who can be considered fully supported by verified income that is not included in the loan analysis. That could mean your spouse who won’t be on the title but has stable, sufficient income, or a child for whom you get regular child support payments. 

Residual Incomes by Region for Loan Amounts of $80,000 and Above

As with the previous table, for families larger than 5, the VA says to add $80 up to a family of seven.  

When you look back at our example from earlier, you can see that the hypothetical borrower’s residual income would be sufficient regardless of where they buy in the United States. Of course, that does not mean they would definitely be approved for a VA loan, as the lender would still need to weigh the rest of their financial profile before making a decision.

Compensating Factors

If your residual income and/or DTI are insufficient, there are other things lenders can consider to help strengthen your application. These are called compensating factors. Some compensating factors include:  

• Great credit history 

• Reasonable usage of consumer credit, like credit cards 

• Minimal consumer debt 

• Long-term employment 

• Significant liquid assets 

• Large down payment 

• Tax credits for childcare 

• And more. 

So, don’t count yourself out just yet if your residual income or DTI is not up to par. You may be able to make up for these by discussing compensating factors with your lender.

Strengthening a VA Loan Application

Eligible veteran borrowers can also try to make strides to improve their financial profile before they seek out a VA loan. Things that might improve your DTI, residual income, or credit score include: 

• Making consistent, on-time payments on debts 

• Increasing your income in your current job 

• Finding a side hustle to help with debts 

• Find ways to cut monthly costs 

Now, if you are hoping to apply for a mortgage, it’s important that you do not switch jobs. Changing jobs close to your loan process can cause some complications that could impact your application.  

It may take some time to improve your financial profile. That’s okay! You can start small by putting together a plan that makes sense for your situation and sticking with it.

Final Thoughts

For eligible veterans, active-duty service members, and surviving spouses, the VA loan can be a great way to buy a home. Now that you have an understanding of residual income, how it’s calculated, and the benchmarks set by the VA, we hope you feel more confident and capable of assessing your situation heading into your VA loan application.