Are you wondering how residual income factors into the mortgage underwriting process? Mortgage lenders use underwriting to assess a borrower’s level of financial risk when deciding whether to approve a home loan. Residual income is an important piece of information in the underwriting process when a buyer is trying to use a VA home loan for the purchase. Also known as “discretionary income,” residual income is the amount you have left from your salary after all monthly debts and expenses have been paid. Learn more about the importance of VA loan residual income from SoCal VA Homes, and you will be guaranteed a much easier and smoother mortgage underwriting process!
Why Residual Income Matters
How does residual income work in getting a VA loan? When residual income is compared to a Veteran’s debt-to-income ratio, the mortgage underwriter achieves a fuller picture of the borrower’s finances. This helps lenders determine if a borrower will be able to afford a monthly mortgage payment. VA Residual income is one factor among others that lenders of VA loans use to decide how large of a mortgage loan to give to a borrower. Factoring residual income into mortgage qualification is unique to VA home loans. The more residual income you have on a regular basis, the greater the loan amount you will be able to get.
VA loan lenders take an interest in residual income because it helps to paint a more comprehensive picture of a Veteran’s finances. VA residual income guidelines are there because lenders want to make sure that those who take VA-backed loans can afford to make monthly payments while also having money left for other living expenses. Lenders view residual income and the debt-to-income ratio as separate guidelines, while also seeing them as interconnected. If a borrower has a high debt-to-income ratio, then residual income will be scrutinized at a very high standard.
Residual Income Thresholds
To qualify for a VA loan, the borrower has to meet a specific residual income threshold, a guide that depends on the size of the borrower’s family and in what part of the country they live in. For example, a family of two living in the Northeast will have a residual income threshold of $755. That same family of two would have a residual income threshold requirement of $738 in the Midwest and South, and a residual income threshold of $823 in the West.
Residual income thresholds involve several different factors and can be confusing. You will want to run all of your information by a well-informed lender to see where you stand financially.
Mortgage Underwriting Process
Every loan application goes through the mortgage underwriting process. It’s a process in which a lender assesses the borrower’s risk, and makes sure that the borrower meets the requirements for a loan. The loan applicant will have to provide a set of important documents to the loan officer and mortgage underwriter. The following documents will be evaluated during the mortgage underwriting process:
- Proof of income in the form of pay stubs or W-2s
- Bank statements
- Tax returns
- Gift letters showing financial support from friends or family members
- Photo ID
- Documentation of renting history (if applicable), and
- Credit history reports
Additionally, the mortgage underwriter will evaluate the borrower’s debt-to-income ratio, credit score, financial history, income, available funds, and residual income.
Contact Us Today!
If you’re a first-time homebuyer, we invite you to read more about qualifying for a VA home loan. We also encourage you to visit our blog to learn more about using your VA home loan benefits! We understand that many first-time homebuyers will have many questions, and we are here for every step. If you’re ready to move forward in purchasing a home, we encourage you to browse our listing of VA approved homes for sale in California. Our listings feature VA approved homes all over Southern California!
SoCal VA Homes is passionate about helping Veterans achieve the dream of homeownership. We know that the process of buying a new home can be daunting, and Veterans face unique hurdles of their own. We have developed a set of programs to help Veterans move forward into home ownership with as few hassles as possible. Contact us online today or give us a call at (949) 268-7742!