A bank statement loan residual income test measures the dollars a household keeps each month after the new housing payment and every debt on the credit report are paid. Lenders that use it set a minimum by household size and often apply it only when the debt-to-income ratio runs above a threshold such as 43 percent.
What does a bank statement loan residual income test measure?
Residual income is qualifying monthly income minus the proposed housing payment and all monthly debt payments. The figure is the cash left for food, transport, childcare and everything else. A debt ratio describes the share of income committed; residual income describes the dollars that remain, which matters more for larger households.
The idea is older than non-QM lending. The VA's underwriting rule asks whether a veteran's residual income will be adequate to meet living expenses after shelter expenses and other monthly obligations are paid, and its VA residual income regulation at 38 CFR 36.4340 sets minimums in tables by family size, loan amount and region. Bank statement lenders that use the test borrow the concept and set their own minimums.
The starting income is the bank statement figure, after exclusions and the expense factor, not gross deposits. That income figure can differ a great deal from what the tax return shows; the comparison of bank statement income and tax return income explains why.
Worked example
The figures are an example for a fictional family of four, with a fictional lender minimum. The lender uses 12 months of deposits.
| Line | Example amount |
|---|---|
| Qualifying monthly income from statements | $9,400 |
| Proposed housing payment | $3,700 |
| Car loan | $520 |
| Card minimums | $180 |
| Total monthly obligations | $4,400 |
| Residual income | $5,000 |
| Debt-to-income ratio | 46.8% |
| Example lender minimum, household of four | $3,000 |
The ratio of 46.8 percent is above a 43 percent trigger, so the lender runs the test. Residual income of $5,000 clears the example minimum by $2,000, and the file can go forward with the ratio as it stands.
Household size and the residual income minimum
The residual income minimum rises with household size because each extra person adds living costs that never appear on a credit report. Lenders publish a table: one figure for a single borrower, a higher one for a couple and an added amount for each dependent. Every person living in the home counts, not only those on the loan.
That rule catches brokers out. The VA rule states that all members of the household must be included, and lenders that copy the test usually follow the same logic. A borrower who lists two children on the application has a household of at least three, even when the spouse is not on the loan.
The tables also differ by lender. Some scale the minimum with the loan amount, others use one figure regardless of size. Ask for the table and confirm the household count with the borrower before you run the numbers.
When does a lender ask for residual income on a bank statement loan?
Most bank statement lenders that use residual income apply it only when the debt ratio is above a set level, often 43 percent, and some use it to allow ratios up to a higher cap. Below the trigger, the debt ratio alone decides. Above it, passing the residual test is what keeps the file eligible.
The VA rule shows the same trade in reverse: when the ratio is above 41 percent and residual income beats the guideline by at least 20 percent, the extra review step it otherwise requires is waived. Non-QM programs set their own versions, so read each lender's guide rather than assuming one rule.
Residual income matters most for borrowers whose income has a short track record. A borrower with bank statement income from a new business often has a thinner income figure, and a strong cushion can help an underwriter accept a higher ratio.
Residual income figures that start from the wrong deposit average
The most common residual income mistake is starting from the wrong income number. A broker who uses the total deposit average, instead of the qualifying average after exclusions and the expense factor, overstates residual income by thousands of dollars. The test passes on the worksheet and fails in underwriting.
Here is how it happens. Take the example family above. If the broker had started from average deposits of $18,800, before the 50 percent expense factor, residual income would read $14,400. The real figure is $5,000. Both numbers clear the minimum in this case, but a tighter file would not.
Checks before you quote residual income
- Start from the qualifying figure described in how to calculate average monthly deposits, after transfers and one-time credits are removed.
- Apply the expense factor before subtracting anything.
- Include every debt on the credit report, including deferred student loans the lender counts.
- Count the whole household, not only the applicants.
Teams that track how often files fail on residual income can add it to the measures in underwriting KPIs for lending teams. TrueBankFlow produces the qualifying deposit average with each exclusion noted, so the income line at the top of the test is the one the underwriter will use. You can see how the analysis works.