Follow up to VA Residual Income

Last week I posted some information regarding VA residual income, but I didn’t really go into a lot of details as to how it’s calculated and the factors that affect it.  Here is a link to that last post – VA residual income. Residual income is basically the income left after all the expense of the house, daycare (if applicable), and state and federal taxes.  The VA has this requirement because they want to make sure the Veteran can afford the home and not get into any financial hardship.  Remember too, that the VA will guarantee a portion of the loan to the lender so there is some level of risk for the Dept of Veteran Affairs.

Factors in VA’s Calculation for Residual Income

As I briefly mentioned above there are some specific calculations when determining a Veterans residual income.  The way it’s calculated is all the same, but the outcomes can be very different.  Another term for residual income is balance available for family support.  Here is a list of deductions from a Veterans pay that will be used to calculate the leftover balance:  Federal taxes, State taxes, Social Security, Medicare, Debts and Obligations and Monthly Shelter Expenses.

Federal Taxes – We can all count on 2 constants in life, death and taxes.  Anyone who makes money understands taxes so I wont go into detail about it.

State Taxes – See comment above.

Social Security – This is a depleting fund the government has set up to pay for others retirement and maybe your own.  I doubt in my life time I will never see any money from SS when I retire.

Medicare – Another Government health insurance plan.

Debts and Obligations – This is all the debt – example – car payments, credit cards, installment loans, etc.  This also includes child support and alimony.

Monthly Shelter Expenses – VA uses this to determine the amount of monthly expenses for the utilities like gas, electric, water/sewer and garbage.  How much a Veteran actually spends each month for these housing expenses can and are obviously different from one Veteran to another, so the VA set the standard by multiplying the square footage of the home by .14 cents.  For example if the SQ footage of a home is 2500 X .14 the monthly housing expense would be $350 per month.

Now that we know what to deduct from a Veterans pay, let’s actually calculate the residual income.

Veteran (Mike) makes $4875.25 GROSS every month and has a wife who doesn’t work and 1 child and lives in the state of Utah and wants to buy a home for $150,000 that has 1850 SQ feet.

Federal Taxes Deducted $361.29
State Taxes Deducted $225.14
Social Security $301.27
Medicare $70.69
Debts and Obligations (including new mortgage payment PITI) $850 for debt
$1072.23 for mortgage
Total debt $1922.23
Monthly Shelter Expense $259
Total Deductions $3139.62

So the gross is $4875.25 and the total deductions are $3139.62 which leaves Mike with a total amount balance of $1735.63 available for family support.  In the last post I gave a table for residual incomes required by region and loan amount.  The amount required for Mike is $990 (West, loan amount over $80,000 and family of 3).  Based on this scenario Mike would be able to qualify for his home.

With this post and my last post, I would think I have hit on all points of VA Residual income and can be used as a reference.

VA Residual Income Requirements for Veterans

Anytime someone wants to partake of the American Dream and own a home, they must go through a series of  checks and balances.  One of them is the capacity to make the payments every month.  This is calculated by determining the total debt ratio which is the gross monthly income divided by the total monthly debts; including the new mortgage payment.  Usually, this is it when doing FHA or conventional loans. The VA, however,  has a step that trumps the debt-to-income ratio, called residual income, which has minimum standards depending on loan size, family size and geographical location.  The VA’s minimum residual income, which is also considered the balance available for family support, is a guide  and should not automatically trigger an approval or rejection of a VA loan.  Instead, it is considered in conjunction with all other credit factors.  An obviously inadequate residual income alone can be a basis for denying a VA loan. Sometimes the residual income can be marginal, but the VA can also look at other compensating factors such as good credit, monthly reserves and how the Veteran applying has handled their past housing expense.

The VA’s debt-to-income ratio is a guide and is an underwriting factor, however, it IS secondary to the residual income calculation.  Over the years, I have done many VA purchases and I have seen Veterans get approved and buy a home with over 55% DTI as long as they met the minimum residual income requirement.  I will now list what the requirements are in a table format:

Table of Residual Incomes for loan amounts of $79,999 and below

Family Size Northeast Midwest South West
1 $390 $382 $382 $425
2 $654 $641 $641 $713
3 788 772 772 859
4 888 868 868 967
5 921 902 902 1,004

Over 5  Add $75 for each additional family member up to 7

Table of Residual Incomes for loan amounts of $80,000 and above

Family Size Northeast Midwest South West
1 $450 $441 $441 $491
2 $755 $738 $738 $823
3 909 889 889 990
4 1,025 1,003 1,003 1,117
5 1,062 1,039 1,039 1,158

Over 5  Add $80 for each additional family member up to 7

Here are the states that fall into the regional locations determined by VA

Northeast

Connecticut, New Hampshire, Pennsylvania, Maine, New Jersey, Rhode Island, Massachusetts, New York, Vermont

Midwest

Illinois, Michigan, North Dakota, Indiana, Minnesota, Ohio, Iowa, Missouri, South Dakota, Kansas, Nebraska, Wisconsin

South

Alabama, Kentucky, Puerto Rico, Arkansas, Louisiana, South Carolina, District or Columbia, Mississippi, Texas VA loan, Florida VA loan, North Carolina VA loan, Virginia, Georgia, Oklahoma, West Virginia

West

Alaska, Hawaii, New Mexico, Arizona, Idaho, Oregon, California, Montana, Utah, Colorado, Nevada, Washington

Some might consider the residual income to be a deterrent, but I feel just the opposite.  With other loans as soon as you go over a certain DTI then the loan can be denied on the spot, but with VA that sometimes is not the case.  It gives the Veteran an additional outlet for approval which is especially nice during these hard economic times.

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