Qualify for a VA mortgage using residual income
VA home loans offer distinct advantages to eligible home buyers, including low mortgage rates and access to zero-down mortgage loans.
VA loans also give borrowers additional ways to qualify for a mortgage.
For example, when a borrower’s debt-to-income ratios are too high to meet official VA loan standards, lenders can approve applications by using a borrower’s residual income instead.
Residual income — which is more commonly known as discretionary income — is calculated by comparing a mortgage borrower’s income and its regular living expenses, plus whatever future housing costs may apply.
VA-approved lenders can use the extra cushion in a buyer’s budget to overlook weakness linked to DTI for purposed of giving a mortgage approval.Click to see your VA loan eligibility (Sep 18th, 2018)
Using your VA mortgage benefits
VA loans have been popular in recent years.
The Department of Veterans Administration has backed more than 2.5 million home loans since the start of the decade, with annual loan counts more than doubling during the last two years.
Enthusiasm for VA mortgages is understandable.
For borrowers with excellent credit scores, VA mortgage rates can be as much as 40 basis points (0.40 percent) below those for comparable conventional loans. And, for borrowers with merely average credit scores, the difference can be 100 basis points (1.00 percent) or more.
That’s a big difference.
Plus, with VA loans, credit score requirements are lenient, and VA buyers never pay mortgage insurance — regardless of the size of their down payment.
Home buyers with military experience should check their VA mortgage eligibility before applying for other mortgage types. Veterans and servicemembers earn their VA home loan benefits, and will typically save big when they use it.
Even with a down payment of 20 percent or more, using the VA loan as an eligible military borrower can save you money.Click to see your VA loan eligibility (Sep 18th, 2018)
Using residual income when DTI is too high
As part of the VA mortgage approval process, your mortgage lender will compare your monthly, verified income to your monthly debt obligations to arrive at a ratio known as your debt-to-income (DTI).
For instance, if your monthly income is $5,000 and your required monthly outlays total $2,500, your debt-to-income ratio would be 50 percent.
That’s too high under most loan programs. But VA underwriters perform additional calculations which can affect your mortgage approval.
Factoring in your estimated monthly utilities, your estimated taxes on income, and the area of the country in which you live, the VA arrives at a figure which represents your “true” costs of living.
It then subtracts that figure from your income to find your residual income (e.g.; your money “left over” each month).
Think of the residual income calculation as a real-world simulation on your living expenses. It is the VA’s best effort at ensuring you a stress-free homeownership experience.
Here is an example of how residual income works, assuming a family of four which is purchasing a 2,000 square foot home on a $5,000 monthly income.
- Future house payment, plus other debt payments: $2,500
- Monthly estimated income taxes: $1,000
- Monthly estimated utilities at $0.14 per square foot: $280
This leave a residual income calculation of $1,220.
Now, compare that residual income to VA residual income requirements for a family of four:
- Northeast Region: $1,025
- Midwest Region: $1,003
- South Region: $1,003
- West Region: $1,157
The borrower in our example exceeds VA’s residual income standards in all parts of the country. Therefore, despite the borrower’s debt-to-income ratio of 50 percent, the borrower could get approved for a VA loan, if it applied.Click to see your VA loan eligibility (Sep 18th, 2018)
3 ways to increase your residual income
Most VA home buyers will meet the residual income requirements set forth by the Department of Veterans Affairs. However, some will not.
As a mortgage borrower, there are three basic ways for you to improve your residual income levels and to help get your loan approved.
Reduce your monthly obligations
As a mortgage borrower with debt, it’s your right to reduce that debt at any time. Simply pay down credit cards to reduce your minimum monthly payment; or, consolidate student loans to a lower payment, if you have them.
You can even consider refinancing a high-payment auto loan to something more affordable.
The more you reduce from your monthly obligations, the higher your residual income can be.
Consider a smaller home
Residual income calculations are, in part, based on the size of the home in which you live. Purchasing a smaller home, therefore, can increase your residual income.
For example, reducing your home size by 250 square feet increases your residual income by $35 per month.
The link between square footage and residual income is one reason to double-check your home’s appraisal. it’s important that the appraiser does not count below-grade rooms such as basements in your home’s square footage calculation.
Shop for a lower mortgage rate
Lower mortgage rates mean lower monthly payments, which reduces the “future payment” figure in your residual income calculation.
Get multiple VA mortgage quotes, therefore, to make sure you’re getting a good rate. Consider paying discount points if it will help you lower your payment.
What are today’s VA mortgage rates?
Today’s VA mortgage rates are low, and you can get approved on the basis of your residual income — even with a debt-to-income ratio of over 50 percent.
Get today’s live mortgage rates now.Click to see your VA loan eligibility (Sep 18th, 2018)