The Residual Income Test is a distinctive requirement of the U.S. Department of Veterans Affairs (VA) home loan program designed to assess a borrower’s financial ability beyond traditional credit and income checks. Unlike common mortgage qualifications that primarily measure your debt-to-income (DTI) ratio, the residual income test focuses on the actual dollars remaining after necessary expenses are paid.
This test calculates your disposable net income after subtracting the new mortgage payment — including principal, interest, taxes, and insurance (PITI) — along with any other monthly debts and estimated family living costs. The VA uses this figure to ensure you have enough funds left over to cover essentials like food, utilities, transportation, and healthcare.
The VA is not lending money directly; instead, it guarantees a portion of the loan to private lenders. Because of this, the VA emphasizes protecting veterans from financial strain that could lead to default. The residual income test acts as a safety check to confirm that homeownership will be affordable in a practical, day-to-day sense.
How Residual Income Is Calculated:
- Start with your gross monthly income.
- Subtract federal and state taxes, Social Security, and Medicare deductions to find your net (take-home) income.
- Deduct your expected new mortgage payment (PITI).
- Subtract monthly payments for other debts like car loans, credit cards, or student loans.
- Deduct child support, alimony, or childcare expenses if applicable.
- Subtract estimated living expenses based on your family’s size and geographical region (as published by the VA).
The remaining amount is your residual income.
VA Residual Income Thresholds:
These thresholds vary depending on family size and regional living costs. For example, a single veteran’s minimum residual income ranges roughly from $480 in the Midwest to $534 in the Western U.S, while a family of four requires approximately $1,092 to $1,213. Veterans applying for loans under $80,000 or in unique circumstances should consult their lender for precise thresholds.
Visit the VA Loan glossary for more information about VA loan basics.
Residual Income vs. Debt-To-Income Ratio:
While the VA also considers your DTI ratio—which compares your total debt payments to your gross monthly income—the residual income test provides a concrete dollar figure representing your capacity to handle living expenses beyond debt obligations. The VA generally looks for a DTI of 41% or less, but the residual income test is a firm affordability requirement.
Tips to Improve Your Residual Income:
- Reduce or pay off existing debts to lower monthly obligations.
- Consider purchasing a home with a lower mortgage payment (PITI).
- Maintain accurate and comprehensive income documentation, including secondary income sources like disability or retirement pay.
- Work with lenders to understand estimated family living expenses used in the calculation.
This focus on residual income makes VA loans uniquely veteran-friendly by prioritizing sustainable homeownership rather than just qualifying on paper. For authoritative details, consult the VA Lenders Handbook, Chapter 4: Credit Underwriting.
For further reading on similar credit and loan qualification concepts, see our articles on Debt-To-Income Ratio and Budgeting.