VA Residual Income

How VA Residual Income Works With VA Assumable Loans

When a VA loan is assumed, the existing loan terms stay in place, but the person taking over the loan must still qualify under VA guidelines. Residual income is one of the core tests lenders use to determine if the new borrower can realistically afford the payment long term.

Residual income is calculated by starting with the borrower's gross monthly income and subtracting:

• Federal, state, and local taxes
• Social Security and other mandatory withholdings
• Monthly housing expense (principal, interest, taxes, insurance, and HOA dues, if any)
• All recurring monthly debts (credit cards, auto loans, student loans, personal loans, and other installment or revolving debt)

The amount left over is the borrower's residual income. For a VA loan assumption, the new borrower must meet or exceed the minimum residual income standard set by the VA for their region, family size, and loan amount. The existing payment may look affordable on paper, but if residual income falls short, the assumption can be denied.

Lenders look at residual income alongside the debt to income (DTI) ratio. If the borrower's DTI is on the higher side, underwriters typically expect residual income to be meaningfully above the minimum guideline to approve the assumption. In practice, strong residual income can offset a higher DTI, while weak residual income can cause problems even when the DTI looks acceptable.

Residual income matters on VA assumable loans because it focuses on what is left to support everyday living costs after the mortgage and other obligations are paid. It is designed to reduce the risk that a buyer takes over a seemingly attractive loan, only to struggle with cash flow once they move in.

Meeting VA Residual Income Guidelines: Regions, Family Size, and High DTI Files

The VA does not use a single nationwide residual income number. Instead, it publishes guideline tables that vary based on three main factors:

• Geographic region (for example, Northeast, Midwest, South, West)
• Family size (typically counting all household members who rely on the borrower's income)
• Loan amount (with different thresholds above and below certain loan sizes)

Lenders use these tables to test whether the person assuming the VA loan has enough money left each month after major obligations to cover typical living expenses. A larger household usually needs more residual income, and some regions have higher required amounts because of higher living costs.

Residual income is treated as a guideline rather than an automatic approval or denial trigger. Underwriters have room for judgment, especially on assumption files. For example:

• If a borrower has a low to moderate DTI, strong credit, and a clean payment history, an underwriter may accept residual income that is close to the guideline.
• If a borrower has a higher DTI ratio, the file usually needs to show residual income comfortably above the guideline to demonstrate that there is a realistic cushion for everyday expenses.
• Other strengths in the file, such as meaningful cash reserves or stable, long term employment, can help, but they rarely fully offset a significant residual income shortfall.

For buyers evaluating a VA assumption, it is not enough to look only at the interest rate and monthly principal and interest payment. Property taxes, insurance, and HOA dues can materially change the total housing expense, and that total directly affects residual income. Two homes with the same loan balance can produce very different residual income outcomes because of these non mortgage costs.

Practical Steps for Buyers and Sellers Considering a VA Assumption

Residual income can make or break a VA loan assumption, so it pays to understand how it will be evaluated before you invest time and money in the process.

For buyers thinking about assuming a VA loan:

• Review your full monthly budget. List all recurring debts and realistic living expenses, not just the mortgage payment you hope to take over.
• Get a residual income estimate early. A lender experienced with VA loans can run the numbers using your income, debts, household size, and the full housing expense on the property.
• Watch your DTI ratio. If your DTI will be at the higher end, expect that you may need residual income above the standard guideline to qualify.
• Consider non housing costs tied to the property. Utilities, commuting, and local costs of living all affect how comfortable that residual income number will feel in reality.

For sellers with a VA loan that might be assumed:

• Understand that the new buyer must qualify. Even if your payment is low, the buyer still has to meet VA credit, income, and residual income standards.
• Partner with a lender who handles VA assumptions regularly. An experienced team can pre screen buyers, explain residual income requirements clearly, and reduce surprises later in the process.
• Be ready for documentation requests. The assumption review mirrors a standard VA underwriting process in many ways, including income, assets, and credit checks on the new borrower.

Taking the time to understand residual income before moving forward helps both sides of a VA assumption avoid delays and last minute denials. When the numbers work, a VA assumable loan can be a powerful tool, but it still has to clear the same affordability test that applies to new VA financing.