Common Reasons VA Loans Are Denied Due to Residual Income and How to Fix Them

VA loans, despite flexible standards, strictly enforce residual income requirements, ensuring borrowers can manage living expenses after paying debts. This means meeting VA residual income requirements is crucial, as it measures post-expense financial breathing room, not just DTI. Common issues include underestimating expenses, low co-borrower income, omitted non-taxable income, large households with modest income, and high debt. Solutions involve adding qualifying income, reducing debt, opting for cheaper properties, increasing down payments, adjusting applications, or relocating.

What Is VA Residual Income?

This is what you’ve got left after you pay all your monthly obligations: mortgage, taxes, insurance, debts, child care, etc. The VA wants to make sure you’ve still got enough money to live your day-to-day life after covering bills. They call it “residual income,” but think of it like your financial breathing room. This isn’t just about being cautious—VA data shows that borrowers with healthy residual income are way less likely to default.

Why VA Residual Income Matters More Than DTI

Look—DTI (Debt to Income ratio) gets a lot of attention. But some buyers who qualify DTI-wise still get denied because their residual income flops. Why? Because the VA’s watching how much cash sticks around to actually live life…not just scrape by.

Here’s how it works:

• They look at your region & family size
• They compare it to preset tables
• If you’re short—even by $50—they will call it out It’s that strict.

Common Reasons VA Loans Are Denied Due to Residual Income

Not hitting the target? It usually comes down to one (or more) of these:

1. Underestimating Monthly Expenses

Way too many folks high-five over a preapproval and forget to factor in stuff like:

• Child care
• Auto insurance
• Union dues
• Transit passes

The VA lender does not ignore these. They bake them into the residual income formula. So if you gloss over ‘em in your financial sheet, you’re setting yourself up to miss.

2. Co-borrower With Little or No Income

Married? Buying with a spouse who isn’t working or has minimal earnings? That still counts as an added head in your household size—even if they don’t bring in income. So residual income needs jump up, while earnings stay the same. That gap can throw your entire app sideways.

3. Too Much Non-Taxable Income Left Out of the Calculation

If you get VA disability, child support, or certain military allowances, guess what? You might be able to gross that income up by 25% when calculating. But I’ve seen people forget to report it, or the lender skips it. Boom—denial.

Always ask: “Are we grossing up my non-taxable income properly?”

4. Large Household, Modest Income

Your residual income requirement scales up with your family size. 2 people? Maybe $1,003/month. 5 people? More like $1,158 or higher depending on your region. If you’re carrying a big household and earning a lower income, you may just fall short on paper—even with a clean credit history. This one’s tricky and unfair, but it happens all the time.

5. High Monthly Debt Payments

This one’s obvious, but overlooked:

• If you’re shelling out hundreds monthly on car notes, personal loans, credit cards—there goes your residual buffer.
• The VA subtracts ALL that off the top when calculating what’s left over.
• Cleaning up that payment stack can move the needle fast.

How to Fix It When You Don’t Meet VA Residual Income Requirements

So what can you do if your loan gets denied for low residual income?

1. Add Qualifying Income

First route—check what other legit income you could or should be adding, like:

• Non-taxable benefits like BAH (Basic Allowance for Housing)
• Spousal income (if they can qualify)
• Child support (if received consistently & documented)
• Rental income (if supported by history & lease)

Check your tax returns, bank statements, anything that shows stable income can help.

2. Reduce Monthly Debt

I had one guy who paid off a used car with $400 monthly payments the week after his denial. He reapplied a month later and qualified, easy. Sometimes it’s just knocking down that one big recurring debt that frees up enough cushion.

3. Switch to a Cheaper Property

Look—I know this sucks to hear—but sometimes your dream house needs more income than you’re currently packing. If buying a slightly less expensive property drops your monthly expenses by $250, that can be enough to meet thresholds. And you can always refinance or upgrade later once you’re better positioned.

4. Increase Down Payment to Reduce Mortgage Expenses

VA loans don’t require down payments—but you can put money down if you want to. Doing that means:

• You borrow less
• Your monthly mortgage payment shrinks
• That frees up more residual income each month

Smart move if you’re stuck just $100 or $200 short.

5. Skip Joint Application If It Hurts You

If your spouse has no income or big debts, you may qualify better solo. Their inclusion might raise your residual income requirement without actually increasing your usable income. Yes, this can be a tough convo to have—but lenders see it all the time. And remember: you can still put your spouse on title; they just don’t have to be on the loan.

6. Move to a Lower-Cost Region

This one’s rare, but I’ve seen it work. VA makes regional adjustments—you might qualify in Ohio but miss the mark in California for the same income. If you’re flexible with your relocation choices, use that to your advantage.

How the Residual Income Chart Works

Here’s a basic look at the 2024 VA Residual Income Requirements: