VA lenders look at many factors when deciding whether or not to approve you for a loan. One of the major factors is the debt ratio. If it’s too high, you don’t qualify. But how high is too high?
Technically, the VA allows a debt ratio up to 41%. This is the total DTI, not just your housing ratio. This differs from all other loan programs that have both a front and back-end ratio. The VA is most concerned with where all of your money goes each month. In fact, they don’t just focus on your DTI. They also look at your monthly disposable income.
Why Your Debt Ratio Matters
The VA is among the minority in terms of loan programs. While they look at the debt ratio – they don’t put a lot of emphasis on it. Lenders tend to look at it a little more closely, though. They use it as a red flag. A ratio that is too high means you are spending too much of your monthly income each month. This leaves little money for daily living expenses, which can hamper your ability to make timely mortgage payments.
However, the 41% maximum DTI is not set in stone. You’ll find lenders that will push the limits. They may allow you to go as high as 50%. Where they cannot mess with the numbers, though, is your disposable income. If a lender decides to accept a higher DTI, they must verify that you have more disposable income. It’s a direct relationship between the two.
Figuring Out Your Debt Ratio
It’s easy to figure out your own debt ratio. This way you know where you stand before you even apply with a lender.
First, you need your gross monthly income. If you know your annual income, divide the number by 12. Remember to use your income before any taxes or other deductions are taken out.
Next, add up all of your monthly debts. This includes minimum credit card payments, student loans, personal loans, car loans, and any loans you may have co-signed. In addition, if you have an IRS payment plan or any other payment plan on collections, you must include them as well. Finally, add the proposed mortgage payment for the VA loan including taxes and insurance.
Last, divide your total monthly debts by your gross monthly income. This is your DTI.
Is it above 41%? If so, you might need to do a little tweaking. Maybe the mortgage payment you wanted is too high. Consider either putting money down on the home to lower the payment or shopping for a less expensive home.
If you can’t tweak the mortgage payment for some reason, try paying off some of your debts. Try paying your credit card balances down or paying off an installment loan altogether. Talk to your loan officer about which debt would impact your DTI the greatest.
Look at the Big Picture
Again, don’t focus on the debt ratio too much. The VA and the lender will look at the big picture. They want to determine how big of a risk you pose for defaulting on the loan. This big picture includes:
- Your credit score
- The amount of assets you have
- The type of debts you hold
- The amount of residual income you have
For example, let’s say you have a 45% DTI. But let’s also say you have a 700 credit score, $10,000 in assets, and more than enough residual income. This may not look very risky to a lender. Just look at the 45% DTI alone may make you seem risky, but that’s not the case. Your credit score shows that you are financially responsible and the fact that you have more than enough disposable income speaks volumes.
Now, let’s say you have a 45% DTI, but you have a 600 credit score. You also don’t have any reserves and you just get by the minimum amount of disposable income. This big picture looks a lot riskier. You don’t have any compensating factors. Plus, your credit score lets lenders know that you probably are not very financially responsible. This could result in a loan denial as lenders don’t want to take a chance on the higher DTI.
As you can see, your debt ratio is a small piece of the puzzle. But, it’s an important one. The less debt you have going into a VA loan application, the better your chance for approval. Don’t focus on that though; focus on everything that makes up your loan application. The more positive factors you provide, the better your chance of approval.