Residual income

DTI shows proportion; residual income shows dollars. A borrower with a high ratio may still have plenty left over in absolute terms, especially at higher incomes, while a borrower with a moderate ratio and a large family may be stretched thin.

Worked example. A family of four has gross income of $7,000 a month. Subtract estimated federal, state and payroll taxes of $1,200, a proposed housing payment of $2,300, $450 in car and card payments and an illustrative $350 for maintenance and utilities. Residual income is $2,700. The lender compares that figure with the VA's published minimum for a family of that size in that region at that loan amount.

VA publishes the minimum residual income tables and the method for estimating maintenance and utilities; lenders apply them as part of underwriting. When residual income comfortably exceeds the requirement, VA guidance allows it to serve as a compensating factor for a debt-to-income ratio above the usual benchmark. Some non-VA lenders and non-QM programs also look at residual income, though it is most closely associated with VA. Because it uses after-tax dollars, the result depends on the state's tax structure and household size more than a simple ratio does.