What is Residual Income When Applying for a Mortgage?

Looking to buy a home? You'll need to know about residual income. This financial metric goes beyond your credit score and debt-to-income ratio to paint a clear picture of your ability to handle a mortgage payment comfortably.

Residual Income: The money a person has left over each month after paying their mortgage, taxes, and other regular bills and debts. Residual income is particularly important when applying for certain types of home loans, as lenders use it to determine if borrowers can comfortably afford their monthly payments.

Breaking Down Residual Income

Think of residual income as your financial breathing room. After all your bills are paid, what's left? That's what mortgage lenders want to know. They look at three main components:

• Your total monthly income from all sources

• Major expenses like housing, utilities, and insurance

• Debt payments including credit cards, car loans, and student loans

Different lenders have different requirements. VA loans have strict residual income guidelines based on where you live and your family size. Conventional loans might be more flexible but still consider your leftover money each month.

Calculating Your Residual Income

Let's walk through how to figure out your residual income:

1. Add up all your income sources (salary, bonuses, investments)

2. List every monthly expense:

• Housing costs (mortgage/rent, taxes, insurance)

• Utilities (power, water, gas)

• Transportation (car payment, gas, maintenance)

• Food and groceries

• Insurance premiums

• Debt payments

Watch out for these common calculation mistakes:

• Forgetting about annual expenses like property taxes

• Not accounting for variable income correctly

• Missing upcoming changes in expenses

Why Residual Income Beats DTI

Your debt-to-income ratio (DTI) only tells part of the story. Residual income shows the actual dollars you have available each month. Two borrowers might have the same DTI, but their residual income could be very different based on their actual expenses and lifestyle.

Improving Your Residual Income

Need to boost your residual income? Try these strategies:

• Pay off small debts to reduce monthly obligations

• Look for ways to reduce regular expenses

• Consider a side job or asking for a raise

• Refinance high-interest debt

Loan Type Requirements

Each loan type treats residual income differently:

• VA Loans: Have specific minimum requirements based on region and family size

• Conventional Loans: Use residual income as part of overall assessment

• FHA Loans: Consider residual income alongside other factors

• Jumbo Loans: Often have stricter residual income requirements

Common Questions About Residual Income

• Q: What's the minimum residual income needed? A: It varies by loan type, location, and family size

• Q: Does family size matter? A: Yes, larger families need more residual income

• Q: What if I'm self-employed? A: Lenders average your income over 2+ years

Taking the Next Step

Understanding residual income puts you ahead in the mortgage application process. It helps you make smart decisions about how much house you can truly afford.

Ready to explore your mortgage options? Contact Bellhaven Real Estate for a personal consultation with our mortgage experts. We'll help you understand your residual income and find the right home loan for your situation.