Home loans guaranteed by the Veterans Administration (VA) offer qualified borrowers a range of financial benefits surpassing many of those found in conventional loans. Approved veterans do not pay for private mortgage insurance or prepayment penalties on their loan. A VA loan also features favorable and competitive interest rates and lower closing costs than those offered by conventional lenders. At the same time, in order to protect lenders from risk, veteran applicants must satisfy basic income qualifications to receive an approval.
Meeting VA Loan Income Requirements
The VA does not place minimum or maximum income requirements on loan applicants. Instead, lenders look at proof of income from full-time employment (30 hours per week minimum). Part-time workers seeking VA loans must demonstrate via income tax returns a two-year record of consistent employment marked by a steady increase in wages. Lenders will calculate a debt-to-income ratio based on current earnings and qualifying debt.
According to the VA, an "acceptable" debt-to-income ratio is 41 percent, based on the percentage of total income dedicated to retiring debt. Borrowers can calculate debt-to-income ratio to assess their qualifications. The calculator uses total gross monthly income balanced against housing expenses (mortgage principal and interest, plus taxes) and existing non-housing debt such as student loans, auto financing, and outstanding credit card balances. Lenders of guaranteed VA loans generally allow applicants to have higher debt-to-income ratios than allowed on conventional mortgages.
Reporting Residual Income for a VA Loan
Applicants are also required by VA lenders to provide information about residual income – the balance left over after the applicant meets existing monthly revolving and installment debt payments, payroll deductions, and state and federal taxes. Because the cost of living varies dramatically from state to state, the minimum residual income requirements also vary by region, ranging at the top end of the scale upwards of three times the amount assessed at less expensive locales. There might be other variables affecting the debt-to-income ratio, too, such as family size. Income gleaned from unemployment compensation, lottery winnings, or one-time merit bonuses does not qualify as residual income.
Reducing Debt Load to Qualify
The VA requires participating lenders to justify reasons for rejecting a loan application based on income if the applicant meets the minimum debt-to-income ratio benchmark of 41 percent. For applicants that fail to meet the income requirements, the VA suggests two alternative steps for reducing debt:
- Reduce the debt load. Applicants can use a debt snowball or debt avalanche to retire debts quickly. With a debt snowball, the consumer pays off loans and credit cards with the lowest balances first. With the avalanche, the consumer pays off the accounts with the highest interest rates first. It might be possible to use both strategies to reduce debt effectively.
- Get a co-signer. Unlike conventional loans where borrowers may use anyone that qualifies financially as a co-signer on the loan, the VA restricts eligible co-signers to unmarried military personnel or the legal spouse of the applicant.
- In additional to meeting income and credit requirements, all VA loan applicants must hold a valid Certificate of Eligibility (COE). Borrowers can explore the eligibility requirements for active service members, veterans and spouses at the VA.