Would it surprise you to know that the VA doesn’t have DTI limits? That’s right, they don’t have a maximum debt-to-income ratio that veterans must meet. The VA chooses to focus on disposable income rather than the debt ratio. They feel that if a borrower has enough disposable income each month to cover the cost of living for each family member, they are less likely to default on their VA loan.
Just because the VA doesn’t have specific VA requirements, though, doesn’t mean the VA lenders don’t have maximum DTI ratios in place.
What DTI Limits do Lenders Have?
Generally, lenders focus on the total debt ratio of a veteran borrower rather than the housing ratio. Typically, you’ll find that lenders allow a total debt ratio between 41% and 43%. This means that between 41% and 43% of your gross monthly income can be accounted for each month.
Remember that your total debt ratio includes not only the mortgage payment, but also any other debts you have. The most common debts include your car payments, student loans, personal loans, and credit cards. Any debt that is reported to the credit bureaus is included in the debt ratio.
What if You Have a Higher DTI?
It happens where a veteran has a debt ratio that exceeds 43%. Because the VA doesn’t have requirements regarding the DTI and lenders underwrite and fund their own loans, they can accept it. But lenders usually require what they call compensating factors in its place. Compensating factors make up for a risk factor, such as the high debt ratio.
The most common compensating factors include:
- Assets on hand – Lenders like it when veteran borrowers have money in a liquid account. This could be a checking, savings, money market, or even stock market investment. Any money that you can liquidate within a day or two can count. This gives the lender peace of mind that you have money to fall back on should your income suddenly stop.
- Small payment shock – Payment shock is the increase you experience in your new mortgage payment versus what you used to pay. This counts whether you had a mortgage before or you rented. The lender will compare the two payments. If your new mortgage payment is only slightly higher than your old housing payment and you were able to make your old housing payment on time, lenders consider this a compensating factor.
- High credit score – The VA doesn’t have a set credit score requirement, but the higher your score is, the better it is for the lender. Generally, lenders like to a see a 620 credit score for VA loans. If you have a credit score higher than 620, it can be a compensating factor. A high credit score usually means that you are financially responsible, which is good in the eyes of the lender.
As you can see, the VA is flexible with their guidelines. It all comes down to the particular lender that you choose. Some lenders have tough requirements, while others are just as relaxed as the VA. It pays to shop around and look for the lender that not only has the best rate/terms, but also the one that has the easiest qualifying requirements for your situation.