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
Over 5 Add $75 for each additional family member up to 7
Table of Residual Incomes for loan amounts of $80,000 and above
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
Connecticut, New Hampshire, Pennsylvania, Maine, New Jersey, Rhode Island, Massachusetts, New York, Vermont
Illinois, Michigan, North Dakota, Indiana, Minnesota, Ohio, Iowa, Missouri, South Dakota, Kansas, Nebraska, Wisconsin
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
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.