If there’s one thing any loan program has in common, it’s the need for a good DTI or debt-to-income ratio. However, the VA loan is in the minority on this one. Yes, they do look at your debt-to-income ratio, but not as much as other programs. Instead, the VA focuses on your disposable income, as they feel this is a better indication of your ability to afford the loan.
What DTI Matters to the VA?
The VA looks at just one debt-to-income ratio versus the two ratios that other programs consider. The VA cares about the total DTI. This means your proposed mortgage payment plus any existing debts. Other programs, such as FHA and USDA loans look at both the front-end and back-end ratios. The front-end ratio is just your housing payment compared to your gross monthly income. The VA looks at the bigger picture. They want to know where you stand each month after all bills are paid.
What’s the Max DTI?
Looking at the total DTI, the VA allows you to go up to 41%. This means 41% of your gross monthly income can cover your total monthly payments. Here’s how that looks:
Let’s say you make $5,000 per month. This means that $2,050 ($5,000 x .41) can cover your mortgage payment plus any existing debts. You can work the equation backwards. You already know what outstanding debts you have, such as credit cards, car loans, and student loans. Let’s say your current monthly payments total $350. This leaves $1,700 for a mortgage payment. The mortgage payment includes principal, interest, taxes, and insurance.
What if Your Debt Ratio Exceeds 41%?
It’s possible that your DTI will exceed 41%. Don’t panic; you may still be eligible for a VA loan. A debt ratio higher than 41% isn’t an automatic disqualifier. However, you will need to have more disposable income than the borrowers who have a debt ratio lower than 41%.
The VA determines a minimum amount of disposable income each veteran must have based on their family size and where they live. These minimums pertain to borrowers whose debt ratios don’t exceed the VA maximums. If your ratio exceeds 41%, you’ll need extra disposable income to make up for the higher ratio.
What Else Does the VA Look For?
The VA, like most other programs, looks at the big picture when qualifying you for a loan. As we stated above, a higher debt ratio can be offset with more disposable income. Other factors can also help offset the risk as well:
- Higher than average credit score shows financial responsibility
- Assets on hand show ability to pay your mortgage even if your income stops
- A down payment shows an interest in the investment
These are just a few examples of how you can prove your worthiness for the loan.
Each Lender Has Their Own Requirements
Now just because these are the VA’s requirements, does not mean lenders don’t have their own requirements too. Each lender can add onto what the VA requires – they call them lender overlays. The VA does not fund the loan, so the lender has the final say in who does and does not get a loan from them.
Some lenders strictly use the VA’s guidelines and nothing else. Others add serious restrictions in order to further decrease the risk of default. No matter what the lender chooses to do, they are backed by the VA’s guarantee. If a borrower defaults on the loan, the VA pays the lender back 25% of the defaulted amount.
Each veteran gets a specific amount of entitlement, which is how the VA guarantees the loan. Generally, they will guarantee any loan up to $453,100. In some high-cost areas, they will even guarantee more than that. If you exceed the guarantee for your area, though, you will have to put down 25% of the difference between the guaranteed amount and the loan amount you need.
While the VA claims not to focus on the DTI, it does play a role in your approval, especially with individual lenders. They want to make sure you can afford the loan as well as the cost of daily living. It’s a way to make sure veterans do not get in over their head and default on their loan.