Debt to Income Ratio for a VA Loan

Are your monthly bills getting in the way of a home purchase?

Balance scaleIf you are interested in purchasing a home with a VA mortgage, it's important to know the maximum debt to income ratio that is allowed. The debt to income ratio is the ratio of your total debt, including your VA mortgage, to your annual income. This ratio is important because it will help you determine whether you are able to afford to pay off your VA mortgage in a timely manner.

What Is the debt to income ratio? The debt to income ratio is a key financial metric that investors and lenders use to determine a person's ability to repay a debt. The ratio compares the amount of debt a person owes to their annual income.

A lot of work will be done by the lender to figure out if you can get a VA home loan or not. A financial measure called the debt-to-income (DTI) ratio is one of the most important.

When it comes to qualifying for a VA home loan, the debt-to-income (DTI) ratio is one of the most important financial criteria for lenders to consider.

It is an underwriting requirement that examines the link between your gross monthly income and your principal monthly obligations, providing VA lenders with information into your buying power and capacity to repay debt.

Some loan types need the examination of two different versions of DTI ratio:

The link between your gross monthly income and your new mortgage payment is examined at the front-end of the process. The back-end ratio takes into account all of your significant monthly costs. When it comes to VA loans, lenders only look at the back-end ratio, which provides a more comprehensive picture of your monthly debt and income status.

Veterans and military personnel who have a DTI ratio more than 41 percent will be subjected to enhanced financial examination. However, although the VA does not impose a maximum DTI ratio, it does establish a boundary between acceptable and unacceptable DTI ratios for potential borrowers.

Although the VA considers the DTI ratio to be a guide to assist lenders, it does not establish a maximum percentage that borrowers must remain within. However, the VA does not provide home loans, and mortgage lenders frequently have their own limits on debt-to-income ratios, which might vary based on the borrower's credit, financial situation, and other factors.

The Importance of Debt to Income Ratio

Since there are so many different types of loans available, lenders use this ratio to determine whether they can trust you to pay your bills on time. The lender is going to look at the total amount of debt you have, and the amount of income you have.

The lender will look at the total amount of your monthly income. For example, if you make $5,500 a month, and your total monthly debt payments are $1,000, your DTI ratio is 50 percent. The VA loan limits are based on the DTI ratio.

When you're looking at your DTI ratio, you want to make sure that it's below 50%. Anything higher than that could be a cause for concern.

How to Calculate DTI for a Mortgage?

As an example, consider that you pay out $900 per month. Monthly debt payments include the minimum monthly payment:

  • credit card payment(s),
  • monthly student loan payment(s) (if applicable),
  • car payment(s),
  • court-ordered child support and alimony,
  • and any other contractual obligation payment.
  • New mortgage payment with real estate taxes and homeowner's insurance

Happy family standing in front of their new homeThe new mortgage payment is also included in the DTI calculation. Utilities are often excluded from the calculation. The debt-to-income comparison excludes payments for mobile phones and other non-credit products.

After adding up all monthly debt payments, lenders compare the total monthly loan payments to the monthly gross income. Additionally, the lender will include non-taxable income. Disability income, social security, and any other monthly income that is not taxed by the IRS may all be included in the gross monthly income total.

To demonstrate the debt-to-income debt ratio, we'll use the following example:

Monthly income – $3,000

Automobile payment – $200
Payments made with a credit card – $100
Loan for school – $100
$500 for a new mortgage payment
TOTAL AMOUNT = $900

Now divide $900 in monthly debt payments by the gross monthly income of $3,000. The debt-to-income ratio is 30% in this example. That is an excellent debt-to-income ratio. However, if you include a second vehicle payment of $300 and $150 in credit card debt and the mortgage payment is $700, your monthly debt ratio explodes to 52% ($1,550 divided by $3,000).

Automobile payment – $200 (1)
Automobile payment – $300 (2)
Payment with credit card – $150
Loan for school – $200
Payment on new mortgage – $700
TOTAL – $1,550 DTI – 52%

The VA's optimal debt-to-income ratio is 41%. However, some lenders will accept an application with a debt ratio of up to 50%; other lenders will even take on a loan with a debt percentage of up to 60%.


What Is VA Residual Income?

In addition to the debt to income calculation, the VA also requires lenders to consider discretionary income in addition to the debt-to-income ratio.

The term "residual income" refers to a calculation that estimates the household's net monthly income after taxes (federal, state, and local), a (proposed) mortgage payment, and any and all other monthly obligations (such as student loans, car payments, credit card payments, etc.) have been subtracted from the monthly paycheck (s).

The cost of upkeep and utility payments is included in as well in this calculation. The net income must be higher than the income tables for the VA residual region.

The calculation of the residual income aims to determine whether the veteran borrower(s) has adequate income to pay for petrol, food, and other basics that are often found in a household.

The VA makes use of charts to assist in the calculation. Two charts are shown below. The first chart is for loan amounts less than $79,999, while the second chart is for loan amounts greater than $79,999. Additionally, the charts take into account the family size and the geographical location of the house.

By subtracting monthly debt payments from the gross income in the above example, we can compare the residual income to the VA's figures.
Assume the residence is located in the Northeast; there are four family members, and the monthly household income is $3,000. In this scenario, the minimum required residual income is $1,025.

$3,000 less $1,550 = $1,450. You're good to go.

But if the residual income came in at less than $1,025, you would need to pay off some bills or lower the purchase price to get under the VA residual requirement.

VA residual income chart

Residual incomes by region

VA-residual-income-less-than-80000

Residual income over 79,900

VA residual income calculation

You can download this spreadsheet from the VA.

VA residual income worksheet

What if my residual income or debt-to-income ratio exceed the limits?

Each mortgage lender has its own set of standards that you must follow; if you do not, you may be refused a loan. However, just because you do not satisfy all of the requirements does not guarantee that your application will be denied.

Depending on the lender, there are strategies to prevent being rejected a loan. For example, if you have income streams from family members who live in the property that are not presently evaluated for loan qualifying, the lender may enable you to utilize those funds to reduce the residual income requirements.

Compensating variables are another technique to assist you in obtaining a VA loan. There are particular compensatory elements (good features of a borrower's loan application that are utilized to counteract a negative component) that may help you qualify but cannot be used to offset low credit.

This may include a median credit score of 720 or higher or the ability to save three months' worth of mortgage payments.

Rotating question markFAQs About the Debt to Income Ratio for a VA Loan

Q. How Important is Debt to Income Ratio?

A. Debt-to-income ratio is one of the most important factors lenders consider when deciding to approve a loan. The debt-to-income ratio is a measure of how much debt a person has compared to their annual income. A high debt-to-income ratio can indicate that a person is struggling to make ends meet and may be unable to afford more debt. Lenders will often be less likely to approve a loan for someone with a high debt-to-income ratio.

Q. How to Improve the Debt Ratio?

A. There are a few ways to improve the VA Debt to Income Ratio. One way is to increase income, which will lower the Debt to Income Ratio. Another way is to decrease debt, which will also lower the Debt to Income Ratio. There are also ways to improve the ratio by increasing the amount of housing allowance a veteran receives.

Q. What is a Good Debt to Income Ratio for VA Loan?

A. A good debt-to-income ratio for VA loans is 41% or less. This means that your monthly debts (including the new mortgage) should not exceed 41% of your monthly income. Keep in mind that this is just a general guideline; your lender may have stricter requirements.

SOURCE: Debt-to-income Ratio: Does It Make Any Difference to VA Loans?

Recommended Reading

  1. How to get a VA loan for a manufactured home
  2. The VA One Time Close Construction Loan: How Does It Work?
  3. Credit Score for a VA Loan: What You Need to Know

Conclusion

In conclusion, VA loans are a great option for those who are looking to purchase a home, but it is important to be aware of the debt-to-income ratio requirements. It is also important to remember that there are other factors that lenders will consider when making a decision about your loan, such as your credit score and your ability to repay the loan. If you are considering a VA loan, be sure to consult with a lender to find out what the requirements are and whether you meet them.