VA loans, like other loan programs, require that you can afford the home you’re proposing to finance. Affordability according to a VA lender is a mix between your current monthly household income and your qualifying debt. Lenders use both to arrive at a debt ratio. What are some of the things VA lenders evaluate when reviewing your income?
VA lenders can use income from a variety of sources but each must meet a minimum set of requirements. The first requirement is that the income must be verified as full time and in VA lender world, full time means working at least 30 hours per week for your employer.
If you’re self-employed, qualified income will be taken from your most recent federal income tax returns. Self-employment income must have a minimum two year history with a sustained amount, with self-employment income showing a year over year increase the most desirable.
Part time income may be used but only if there is at least a two year history of part time work along with the VA lender determining the part time income has a likelihood of continuance. Most other income sources that can be used such as income from interest, dividends, disability, retirement or pension must pass a financial litmus test verifying the receipt of such income for the last two years with an expected continuance of at least another three years.
Are There Income Limitations for VA Loans?
No, the VA does not limit income for qualifying VA loan borrowers. Other government-guaranteed mortgage programs can set a maximum income amount to qualify for specific loan programs but the VA has no such requirement.
Regardless if you make $500,000 per year or $50,000 per year, VA lenders underwrite your loan in the exact same manner as it addresses debt to income ratios and affordability.
VA loans do have a unique qualifying guideline that establishes what is called “residual income” that VA borrowers must have.
Residual income is the amount of money left over from all borrower’s paychecks after the mortgage payment, property taxes and insurance, federal and state withholdings and qualifying installment and revolving debt are taken out of the borrower’s gross monthly check.
Qualifying installment and revolving debt include minimum monthly payments toward credit cards, automobile and student loans. Any monthly debt that appears on a borrower’s credit report can be used to count toward required residual income minimums.
Other debt that may not show up on a credit report that may also be counted is monthly spousal and child support payments and day care. Other expenses such as food, utilities and entertainment are not included in the residual income calculation.
Residual income requirements vary based upon such factors as the number of people in the household, the mortgage amount and even the region of the country the property is located. For example, a single borrower in the South must have at least $441 left over each month while a family of five living in California is required to have at least $1,158 in residual funds. VA lenders keep a residual income chart for you to review at your request or you can simply ask your VA lender if you meet the VA residual income guidelines.
There are certain types of income that do not meet VA lending guidelines. Income that cannot be used to qualify for a VA loan include gambling or lottery winnings. Unemployment compensation may not be used. One- time performance bonuses may not be used nor any isolated payment to the borrower by an employer.
VA borrowers must also qualify using the income from those living in the household and income from non-occupying co-borrowers like grandparents or others not living in the home cannot be counted.
In essence, if there is no consistent history of the income being received and there is no verified likelihood of continuance as estimated by the VA lender, the income may not be used, regardless of its existence.