There’s no disputing the fact that VA home loans are an outstanding benefit for veterans and active duty service members. The ability to refinance up to 100% with zero down payment is an incomparable advantage over traditional financing options. However, despite their exclusivity, VA loans are like other loans in that they require you to have qualifying income in order to be approved for financing.
Affordability, in the eyes of a VA lender, is a blend of your monthly household income and your qualifying debt. Lenders use both to arrive at a debt ratio.
Here are some Q&As along with a closer look at some of the factors VA lenders evaluate when reviewing your income.
What Is Qualifying Income?
Qualifying income shows that the borrower has enough income to cover the mortgage they want. To be approved for a VA home loan, the borrower must show that they meet three main standards of income: stability, continuing and sufficiency. In other words, the borrower’s income must be steady and reliable, expected to continue on a regular basis, and sufficient enough to cover the mortgage payments.
Stability is often determined by the applicant’s employment history. The VA requires that you must be able to show two years of consistent income, preferably documented through W-2s. If there are any gaps in employment in this two-year period, they must be substantiated. If there’s a break due to school or training for work, it can be counted toward the two-year requirement.
What Kind of Income Is Eligible?
VA lenders can use income from a variety of sources, and each must meet certain requirements.
- Salary/W-2 income: Full-time work is considered to be at least 30 hours a week at one employer.
- Self-employment income: taken from your most recent federal income tax return. Must have a minimum two year history with a sustained amount, with income showing a year-over-year increase the most desirable.
- Spouse’s salary (if the spouse is cosigning)
- Part-time income: may be used if you have a two-year employment history without interruption. Seasonal employment may be used if you can demonstrate a two-year history and evidence that the position will continue.
- Can part-time employment be considered as additional income for an applicant that also has a full-time job?
- Overtime or bonus income: An average of the bonus or overtime income over the last two years is used. It must be documented as consistent over a two-year period and likely to continue.
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.
- Commissions: an average over the previous two years. You must also provide your federal tax returns with all schedules, subtracting any business expenses for which you haven’t been reimbursed from your gross income.
- Retirement/Social Security: Verification is required. If the income is scheduled to expire within three years, this cannot be used to qualify as income.
- Alimony or child support: You can choose to use this as qualifying income, but you must provide a 12-month payment history from your ex-spouse or the court showing consistent payments made on time, and proof that the payments will continue for a minimum of three years. A copy of the divorce decree and/or child support order is required.
- Rental income: Must be received from investment properties you own. Income from roommates in a single-family property you occupy does not count. You may have to provide proof of experience as a landlord and proof of three months’ worth of mortgage payments.
There may be other forms of income that allow you to qualify for a VA loan. Talk to a VA lender for more information.
Are There Income Limitations for VA Loans?
No, the VA does not limit income for qualifying VA loan borrowers. This makes the VA loan program different from some other government-guaranteed mortgage programs, which can set a maximum income amount to qualify for specific loan programs.
Whether you make $500,000 per year or $50,000, 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.
How Does Residual Income Work?
Residual income is the amount of money left over from the borrower’s paycheck after the mortgage payment, property taxes, insurance, federal and state withholding, 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 include 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. The VA traditionally prefers that your debt-to-income ratio be no higher than 41%, so a borrower in an expensive area like California will need a higher income.
What Kind of Income Is Non-Qualifying?
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. Also excluded are one- time performance bonuses or any isolated payment by an employer.
Income from non-occupying co-borrowers like grandparents or others not living in the home cannot be counted.
In general, 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 counted.
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If you're ready to move forward or just want more information, the next step is to get started finding a VA lender.
