Understanding Residual Income in VA Mortgages
When it comes to securing a VA home loan, understanding the concept of residual income is crucial. Residual income plays a significant role in the VA's assessment of a borrower's financial stability and ability to comfortably manage homeownership expenses. In this blog post, we'll delve into how the VA defines and calculates residual income for VA mortgages.
Defining Residual Income: Residual income, in the context of a VA mortgage, refers to the amount of money left over after covering monthly debts and housing-related expenses. The VA uses this metric to assess a borrower's financial health beyond just their credit score and debt-to-income ratio. Unlike traditional mortgages, the VA emphasizes the borrower's capacity to meet daily living expenses, in addition to housing costs.
Calculating Residual Income: The VA has established specific guidelines for calculating residual income, taking into account the borrower's family size, geographical location, and the proposed mortgage payment. The calculation involves deducting various monthly obligations from the borrower's gross income.
The residual income calculation typically includes:
1. Principal and Interest on the Mortgage: The anticipated monthly payment for principal and interest is a significant factor.
2. Taxes and Homeowner's Insurance: Property taxes and insurance costs are essential components of the residual income calculation.
3. Monthly Debt Payments: This includes other recurring debts such as car loans, credit card payments, and any other obligations that appear on the borrower's credit report.
4. Utilities and Living Expenses: Basic living expenses, such as utilities, groceries, transportation, and healthcare, are factored in to ensure the borrower has enough income to cover these necessities.
The formula for residual income considers these factors collectively to determine the surplus income available to the borrower.
Importance in Loan Approval: Residual income is a critical factor in the VA loan approval process. The VA sets specific residual income thresholds based on the borrower's family size and geographic location. If the calculated residual income meets or exceeds the VA's requirements, it strengthens the borrower's eligibility for a VA loan. Having a healthy residual income demonstrates to the VA that the borrower is financially stable and can comfortably afford homeownership without sacrificing their ability to meet other essential living expenses. This holistic approach sets VA loans apart, recognizing that financial well-being goes beyond the ability to make a mortgage payment.
For veterans and active-duty service members seeking a VA mortgage, understanding residual income is paramount. The VA's unique approach to evaluating a borrower's financial capacity ensures that homeownership is not only achievable but sustainable in the long run. By considering residual income, the VA aims to support service members in their pursuit of the American dream while promoting financial responsibility and stability. If you’d like to get pre-approved for a VA loan, click here!