VA loan approval hinges on residual income, not just DTI
VA loan applicants who focus only on debt-to-income ratio may be missing the number that actually decides approval. According to Aaron Hammonds, a former VA loan processor writing for Military.com, residual income is the metric lenders lean on most, and it works differently than the DTI math most borrowers expect.
Snapshot
Hammonds explains that residual income is the net monthly cash left over after the mortgage payment, taxes, insurance and recurring debts are paid, meant to cover everyday costs like groceries and gas. The VA sets minimum residual income thresholds by region and family size, and those minimums shift depending on a borrower's DTI.
Key points
- Residual income is the real test: Hammonds says the VA uses this leftover-cash figure, not just DTI, to judge whether a household can actually afford a loan.
- Thresholds vary by region and family size: for loans of $80,000 or more, the VA's baseline monthly minimums differ across the Northeast, Midwest, South and West, and rise with each added family member.
- DTI changes the bar: borrowers at 41% DTI or lower only need to meet the standard regional minimum, according to Hammonds.
- Above 41% means a higher cushion: Hammonds explains that borrowers exceeding 41% DTI must show residual income at least 20% above their regional requirement, illustrating it with a Michigan family of four needing $1,203 instead of $1,003 at a 43% DTI.
- Lender experience matters: Hammonds advises working with a mortgage lender well-versed in VA loans to sort out how these figures apply to an individual's finances.
Quick take
For veterans and service members shopping for a home, this is a reminder that a seemingly acceptable DTI isn't the whole story. Hammonds' breakdown suggests borrowers should run their own residual income numbers early, rather than assuming DTI alone will make or break approval.
Read the full story: military.com