VA Loans: How Much Debt to Income Ratio is too Much?

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

Balance scaleGetting a VA loan is one of the first things a lender will want to know about you. This calculation will help them figure out how much debt you can handle and if you're a good candidate for a VA loan.

What Is the Debt-to-Income Ratio? An easy way to figure out how much of your income goes to debt each month is to figure out your debt-to-income ratio (DTI). When you divide your total monthly debt payments by your total monthly income, this is how it's worked out:

A lot of work will be done by VA lenders 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.

What is the purpose of the 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?

Nice suburban houseAs 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

The 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?

The VA requires lenders to consider discretionary income in addition to the debt-to-income ratio.

Residue income is the money left over after you've paid all of your expenses (including the new mortgage payment). 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.

Residual incomes by region

VA-residual-income-less-than-80000

Residual income over 79,900

Suppose your residual income or debt-to-income ratio (DTI) does not meet the requirements.

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 FICO® Score of 720 or higher or the ability to save three months' worth of mortgage payments.

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.