Loan Officer Practice Exam 2025 – Comprehensive All-in-One Guide for Exam Success!

To understand why W-2 income is not subtracted when determining residual income in the context of a VA-guaranteed loan, it's essential to first grasp the concept of residual income itself. Residual income is calculated to ensure that borrowers have enough leftover income after covering basic debts and housing expenses to support themselves and their families.

When calculating residual income, key factors that are typically subtracted include housing expenses, taxes, and recurring debt obligations. Housing expenses encompass costs associated with the mortgage, such as loan payments, insurance, and maintenance fees. Taxes refer to property taxes that the borrower must pay. Recurring debt includes any monthly payments that the borrower is obligated to make, like credit card payments, auto loans, or personal loans.

In contrast, W-2 income represents the gross income earned by the borrower from their job, which is the base from which expenses are considered. It plays a crucial role in the overall financial assessment of a borrower but is not subtracted when figuring out how much residual income remains after meeting the necessary obligations. Instead, it is a positive factor that helps determine the borrower's capacity to manage the loan and make favorable payments.

This understanding is vital in the VA loan context, as the program is designed to help veterans afford homes