On August 24, 2026, the VA amended its Lenders Handbook (M26-7, Chapter 4) so that unpaid non-medical collection accounts without a payment arrangement now count as 5% of the balance divided by 12 months in monthly qualifying debt — not 5% of the balance as a flat payment (VA Lenders Handbook M26-7). The change, worth hundreds of dollars a month in buying power, is why veterans previously declined over collections should recalculate now.
For a veteran carrying a $10,000 collection, the revision is the difference between a $500 monthly debt hit under the old rule and a $41 hit under the new one. That freed income can push a near-miss applicant over the qualifying threshold. Here is how the math works and what it means for residual income, the VA's signature qualifying test.
The collection math change, step by step
Before the August update, when a borrower had a non-medical collection with no established payment arrangement, the VA's underwriting guidance counted 5% of the outstanding balance as a flat monthly debt. On a $5,000 collection, that meant a $250-per-month obligation even though nobody was billing the veteran that amount.
The revision keeps the 5% figure but now spreads it across the year: 5% of the balance, divided by 12. The same $5,000 collection becomes roughly $21 a month. That payment structure mirrors how the VA already treats student loans — for a $25,000 student loan balance, the handbook computes 5% ($1,250) divided by 12 to a monthly payment of $104.17 (VA Lenders Handbook M26-7, Chapter 4).
The before-and-after on your qualifying income
Collection balance | Old monthly hit (5% flat) | New monthly hit (5% ÷ 12) | Buying power freed each month |
|---|---|---|---|
$5,000 | $250 | ~$21 | ~$229 |
$10,000 | $500 | ~$42 | ~$458 |
$25,000 | $1,250 | ~$104 | ~$1,146 |
The freed amount matters two ways: it lowers your debt-to-income ratio, and it directly raises your residual income — the dollars actually left over after the mortgage, taxes, insurance, maintenance, utilities, and other debts are paid. The VA uses residual income as its signature qualifying test, one unique among major loan programs (Simply Approved Mortgages).
Residual income is the real deciding factor
Most borrowers never hear of residual income, yet it is often what decides a VA approval. It is the money left over each month after the new mortgage's principal, interest, taxes and insurance, plus all other recurring debts and estimated maintenance and utility costs. The VA publishes required minimums that vary by region, family size, and whether the loan is above or below $80,000 (Simply Approved Mortgages).
A large collection payment drags that leftover figure down. Under the old rule, a $10,000 collection cut residual income by $500 a month — enough to push a family below the regional threshold. At $42 a month, the same debt no longer sinks the file. And because the VA treats 41% debt-to-income as a guideline rather than a hard cap, a file with strong residual income can still be approved above it. This change targets exactly the near-miss applicant who failed residual income because of how their collections were calculated.
Who should re-run the numbers now
Any veteran who was declined, suspended, or limited in the past because non-medical collections created too large a monthly obligation should ask their lender to recalculate (VA loan guidance). The guideline change does not guarantee approval — credit history, residual income, and the full loan profile must still satisfy VA and underwriting requirements. But for a borrower who was close, this single revision can be the difference between waiting and buying.
Mike Engelking is a VP/Branch Manager at Nova Home Loans (NMLS #163280) in Phoenix, serving veterans across Arizona and many other states. If a recent VA loan exploration was derailed by collection accounts, it may be worth running the numbers again.
Ready to recalculate? Call 480-500-3070, email EngelkingTeam@NovaHomeLoans.com, or visit MikeEngelking.com to get started.
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