A Veteran once asked me:

“If my debt-to-income ratio is too high, does that mean I can't get a VA loan?”

No.

And this is one of the places where people who don't understand VA loans can screw up a perfectly good loan.

VA underwriting isn't just about looking at a debt-to-income ratio and deciding whether somebody fits inside a box.

There is another number that matters:

Residual income.

And if you're using a VA loan, you need to understand what the hell that means.

WHAT IS VA RESIDUAL INCOME?

Residual income is basically the money your household has left after certain major monthly expenses and obligations are accounted for.

Think about it this way.

Two families can earn exactly the same amount of money.

They can even have similar debt-to-income ratios.

But one family might have considerably more money left every month to actually live on.

That's what residual income is trying to measure.

VA describes it as the net income remaining after debts, obligations and monthly shelter expenses are deducted.

In plain English:

After the bills are paid, how much money does your family have left to live?

That's a pretty damn reasonable question.

HOW IS RESIDUAL INCOME DIFFERENT FROM DEBT-TO-INCOME RATIO?

Debt-to-income ratio, or DTI, compares monthly debt obligations with gross monthly income.

Residual income looks at what's left.

That's a big difference.

DTI is a percentage.

Residual income is a dollar amount.

And VA underwriting considers both.

That's one reason I hate when people reduce mortgage qualification to:

“Your DTI is X, so you qualify.”

Or:

“Your DTI is X, so you don't.”

Mortgage underwriting isn't always that simple.

VA underwriting definitely isn't.

DOES VA HAVE A MAXIMUM DEBT-TO-INCOME RATIO?

You'll hear 41% thrown around constantly with VA loans.

But don't confuse a guideline with a brick wall.

VA's underwriting guidance uses 41% as an important benchmark when evaluating the total debt ratio.

That does not mean every borrower above 41% is automatically denied.

The entire credit picture matters.

Income matters.

Credit history matters.

Assets can matter.

And residual income can matter a hell of a lot.

A borrower with strong residual income may present a very different risk than somebody with the exact same DTI who barely has anything left after the bills are paid.

That's why knowing how to actually structure and underwrite a VA loan matters.

HOW DOES VA CALCULATE RESIDUAL INCOME?

The calculation looks at the household's income and subtracts applicable obligations and expenses.

That can include things such as:

Federal and state income taxes.

Social Security and other payroll deductions.

The proposed housing expense.

Installment debts.

Revolving debts.

Other recurring obligations.

And certain expenses that don't necessarily show up as traditional debt.

What's left is the household's residual income.

That's the number we're comparing with VA's guideline.

DOES CHILD CARE MATTER?

Yes.

And this surprises people.

A credit report doesn't necessarily show you what somebody spends every month on child care.

But that doesn't mean the expense isn't real.

VA underwriting requires lenders to consider applicable child-care expenses when analyzing the borrower's obligations.

That can have a significant impact on residual income.

This is another reason why simply looking at the debts on a credit report doesn't tell you the whole story.

HOW MUCH RESIDUAL INCOME DOES VA REQUIRE?

There isn't one number for everybody.

VA's residual-income guidelines vary based on:

Family size.

Geographic region.

Loan amount.

For example, VA separates the country into regions including Northeast, Midwest, South and West.

The required guideline generally increases as household size increases.

For loans of $80,000 and above, the VA guideline for a family of four ranges from $1,003 to $1,117 per month, depending on the region.

Here in the West, the guideline for that same family of four is $1,117 per month.

That's why somebody telling you:

“VA requires $X in residual income.”

without knowing the household, loan amount and location isn't giving you the entire answer.

WHAT COUNTS AS FAMILY SIZE?

Family size isn't necessarily just the number of borrowers signing the mortgage.

VA's analysis considers the household members who depend on the income available to support the family.

There are also situations where an individual may potentially be omitted from the family-size calculation when that person is fully supported by verified income that isn't being included as effective income in the loan analysis.

This is one of those areas where details matter.

A family of two and a family of six earning the same income don't have the same household expenses.

VA recognizes that.

WHY DOES WHERE YOU LIVE MATTER?

Because the residual-income guidelines are regional.

VA divides the country into:

Northeast

Midwest

South

West

Utah, for example, falls within the Western region.

And the required residual-income figures for the West are generally higher than those for some other regions.

So again:

You can't properly analyze residual income without knowing where the property is located.

WHAT IF YOUR DTI IS ABOVE 41%?

This is where residual income becomes particularly important.

A DTI above 41% doesn't automatically kill a VA loan.

VA underwriting requires the overall loan to make sense.

Strong residual income can be an important compensating factor when the debt ratio is higher.

That doesn't mean:

“Residual income is good, so DTI doesn't matter.”

It means you have to analyze the whole damn file.

That's what underwriting is supposed to be.

Not finding one number you don't like and immediately telling a Veteran no.

DOES STRONG RESIDUAL INCOME GUARANTEE APPROVAL?

No.

And I want to be really clear about this.

Passing the residual-income test does not automatically mean you're approved for a VA loan.

You still have to meet the applicable credit, income, occupancy, entitlement, property and underwriting requirements.

Residual income is part of the analysis.

It isn't a magic approval button.

Likewise, having a higher DTI doesn't automatically mean the loan is dead.

The whole file matters.

WHY DO I LIKE THE RESIDUAL-INCOME TEST?

Because it asks a question that actually matters in real life.

Can this family afford to live after making the mortgage payment and paying its other obligations?

You can obsess over percentages all day.

But families don't buy groceries with percentages.

They buy groceries with dollars.

They don't put gas in the car with a DTI ratio.

They use money.

Residual income forces us to look at what's actually left.

That's one of the things I like about VA underwriting.

WHY DO VA LOANS GET MISUNDERSTOOD?

Because too many people try to underwrite them like every other mortgage.

They see a higher DTI and panic.

They misunderstand entitlement.

They don't understand residual income.

They get nervous about VA appraisals.

They misunderstand seller concessions.

And then the Veteran hears:

“VA won't allow it.”

Sometimes VA isn't the problem.

Sometimes the person handling the VA loan is the problem.

There's a pretty damn big difference.

A SIMPLE EXAMPLE

Let's keep the math simple.

Imagine a household has $8,000 of monthly qualifying income.

After taxes, the proposed housing expense, debts and applicable obligations are accounted for, let's say $2,000 remains.

That $2,000 is then evaluated against the applicable VA residual-income guideline based on the loan amount, family size and region.

That's fundamentally different from simply saying:

“Their DTI is 43%, so the answer is no.”

One number tells you a percentage.

The other helps tell you what the household actually has left.

You need the complete picture.

THE BOTTOM LINE

VA residual income isn't some obscure underwriting rule nobody needs to understand.

It's one of the things that makes VA underwriting different.

Your debt-to-income ratio matters.

But it isn't the entire story.

VA also wants to know whether your household has enough money remaining after major obligations to handle normal living expenses.

And depending on the file, that can matter significantly.

So if somebody tells you:

“Your DTI is too high. You can't get a VA loan.”

My next question would be:

“What does the residual income look like?”

If they can't answer that?

I'd probably get a second opinion.

HAVE A VA QUALIFICATION QUESTION?

Been told your DTI is too high?

Have complicated income?

Not sure whether your lender actually understands VA underwriting?

Let me take a look.

I've closed more than 500 VA loans, and complicated doesn't automatically mean impossible.

Sometimes the answer is no.

Sometimes the answer is yes.

And sometimes you just need somebody who knows what the hell they're looking at.