What is residual income and will I pass it?

Four pages on this site call residual income VA's real qualifying test. This is the page that explains it.

What it is

Residual income is what is left of your gross monthly income after the lender subtracts four things:

1. The full new house payment — principal, interest, property taxes, homeowners insurance, and any HOA, metro district or special assessment.
2. Your other monthly debts — car payments, student loans, credit card minimums, child support and alimony, and anything else on the credit report or the application.
3. Estimated taxes — federal and state income tax and Social Security and Medicare withholding, estimated from your income, not copied from your pay stub. Tax-free income, like BAH and disability compensation, has no tax taken off it here.
4. Maintenance and utilities — a flat allowance per square foot of the house, which is why a bigger house lowers residual income even at the same payment.

The number that remains is compared to a table VA publishes in the Lenders Handbook. The table has a minimum for each family size in each of four regions of the country — Northeast, Midwest, South and West — with a higher minimum for larger loan amounts. Family size counts everyone the borrower supports, including a spouse who is not on the loan, unless that spouse documents independent income. This page does not print the table: the figures are VA's to publish, they sit in the Lenders Handbook your loan officer works from, and the VA loan guidelines page covers where they fit in the rest of the file.

Why it matters more than the ratio

VA's debt-to-income guideline is 41%, but VA is explicit that the ratio is a guide, not a cutoff. A file above 41% is approvable when the lender documents compensating factors and the residual income exceeds the table minimum by at least 20%. A file below 41% can still fail if residual income is short. That is the piece that other loan programs do not have and the reason a VA approval sometimes surprises a buyer who was told no elsewhere — and, occasionally, the reason for a no that a ratio would have missed.

It also explains a pattern in who fails. Residual income is a dollar amount, and the table rises with family size, so the buyers who come up short tend to be large families in the West and Northeast regions, buyers carrying child support or alimony, and anyone whose debts are moderate but whose income is modest. Two families with identical ratios can get different answers because one has six people at the table and the other has two.

Where the estimate goes wrong

The tax line is the one that moves. The lender estimates federal and state withholding from your income; the estimate is usually close to your pay stub but not identical, and it is higher in a high-tax state. The maintenance line is the other: it is scaled to the house, so the same payment on a larger house leaves less residual income. Both work in favor of a buyer with a lot of tax-free income — BAH, disability compensation, the housing portion of a GI Bill stipend — because none of it is taxed and most lenders also gross it up when computing the ratio.

Will you pass?

Most borrowers with a normal debt load do. The test is designed to fail the loan that a ratio would approve on paper but that leaves the family with nothing at the end of the month, which is a good thing to learn before you close rather than after. If you want to know before you shop: a pay stub, a credit report and the payment on a house you are considering are enough for a loan officer to run it. If the answer is close, the levers are the same ones that move any approval — paying down a revolving balance, a smaller house, or a co-borrower spouse whose income counts. The credit and residual income page covers how lenders weigh the credit side, and the orders-as-income page covers what counts when you are buying on a PCS before the new pay starts.