Explaining the VA’s Standard for Residual Income

Despite the fact that the majority of VA loans are completed with zero down payment, they continue to be one of the safest lending program available today.

One reason for this success is a unique income standard that aims to ensure veterans can handle the financial burden of a new mortgage payment.

This standard is called residual income.

Monthly Leftovers

Residual income applies only to VA loans.

Basically, residual income is how much money you have left over each month after all of your major expenses are paid. Those leftovers cover typical family needs like gas, food, clothing and utilities.

The VA wants to know that veterans have enough residual income to comfortably run the household financially.  A mortgage payment can put a significant strain on family finances. So prospective VA home buyers must have a minimum amount of residual income depending on where they live and how many people live in the home.

Here’s a look at the VA’s residual income break down:

Table of Residual Incomes by Region

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

  $1062

   $1,039

   $1,039

   $1,158

over 5

Add $80 for each additional member up to a family of seven

So, as an example, a Colorado family of four must have at least $1,117 in residual income each month. The standards are higher on the coasts, where the cost of living is typically more expensive.

Additionally, if a family’s debt-to-income ratio is above 41% the residual income requirement increases by 20%.  So for the same Colorado family of four, if the DTI ratio is 42% the residual income requirement would increase to $1,340.

Failing to meet the residual income standard isn’t supposed to result in automatic rejection of a loan application, but it can certainly be a deal breaker. This is a non-negotiable requirement.

How to Count Overtime Income Towards a VA Home Loan

Income isn’t everything when it comes to getting a VA home loan, but it’s a pretty important factor. Obviously, you have to be able to afford the monthly mortgage payments and have enough money left over each month to take care of regular expenses (better known as residual income).

Lenders will want to make sure the money you’re bringing home is stable, reliable and likely to continue. Otherwise, banks and lending institutions won’t count it as “effective income,” meaning it won’t actually count toward mortgage qualification. For example, disability income, child support income, basic allowance for housing (BAH) and overtime can all be counted.

How income is counted may vary due to the type of income reported. Certain sources like child support and overtime are acceptable, but VA borrowers will often need a paper trail documenting their history and must prove the income stream will continue.

Let’s take a closer look at overtime income and what you’ll need in order to have it count toward qualifying for a VA home loan.

Overtime Income

For lenders, it’s about consistency and stability. There are typically two major concerns when it comes to overtime income:

  • Is the borrower guaranteed, required or allowed to work those extra hours?
  • Has the borrower shown an ability to work all those extra hours?

You may wonder why a lender may want to know if you have the ability to work the extra hours, but it’s vitally important.  Lenders want to make sure you can handle the additional workload.  Not everyone is cut out for 60-hour workweeks, leading some to burnout in time.  If this happens, workers tend to ask for and receive less overtime which may make it difficult to make the monthly mortgage payments.

So how do you ease a lender’s mind and get them to count your overtime income? Generally, you’ll need at least a two-year history of receiving that income to make it work, even if your employer confirms the overtime is guaranteed.  Of course, there are some exceptions that can vary by the individual borrower.

Overtime Exceptions

As in life, there are exceptions to most every rule.  For example, let’s say you’re close to having 24 consecutive months of overtime, maybe 20 months.  Underwriting  may be able to calculate your average overtime over the last two years and use the figure, which obviously will be less than what you would have if it was a full 24 months.

People who work a lot of hours but have irregular schedules from one week to the next can also be eligible before the two-year mark. Firefighters and nurses are  good examples . If you work 88 hours one week and then have the next week off, that’s 44 hours in a pay period. In these cases, a VA borrower may be able to count their overtime income with just a year’s worth of tax returns.  Underwriting may consider other factors to offer a final decision on the loan.

Overtime can be tricky.  If you don’t have a 24-month history of overtime with a single employer. but you’re working overtime consistently at both, a lender may be able to count it as long as the income is likely to continue.  Again this is a case by case scenario and Underwriting may consider other factors before offering a final decision on the loan.

As with so many employment issues, each borrower’s situation is different. Lenders will hasten to make broad generalizations because everyone’s employment circumstances are so unique.

If you’re unsure how your employment or overtime situation stacks up, talk with a VA Loan Pro specialist at 505-918-1028. They can let you know what might be possible.

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American Mortgage & Equity Consultants, Inc.  NMLS # 150953

Todd McManigal   505-918-1028   or 303-378-1272                               NMLS # 267557

todd.mcmanigal@amecinc.org

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