Understanding and navigating the VA loan process can be tricky. From DTI to credit scores, there is a lot to consider when applying for a VA home loan.
Wondering if your debt-to-income ratio will affect your VA loan application? We’ve compiled a complete guide on everything you need to know about debt-to-income ratios and VA loans.
What is Debt-To-Income (DTI)?
A debt-to-income ratio is the portion of your gross monthly income that is allocated to your debt. It is the calculation of how much of your income you are using to pay outstanding debt. Creditors use the DTI to evaluate how much additional debt you can take on.
Home loan lenders will look to lend to those with lower DTI, as they are considered less risky. If someone with a low DTI were to fall into financial hardship, it would be easier to pay off their debt.
Higher DTI ratios, on the other hand, use a larger portion of their income for their monthly expenses. It would be more difficult to pay off debt in a financial crisis with a higher DTI.
Types of Debt-To-Income Ratios
There are two different types of DTI: front-end DTI and back-end DTI. Front-end DTI considers the basic debts in its evaluation. Usually, only necessary debts are considered including mortgage payments, insurance, taxes, etc.
Back-end DTI is a more in-depth evaluation. It takes all your debt into consideration. This will include student debt, credit card debt, and more.
Most lenders for VA loans will only use back-end DTI ratios. This is because back-end DTIs offer a more holistic understanding of your financials.
What is the Debt-To-Income Ratio for a VA Loan?
Debt-to-income ratio is one of the factors that help lenders decide whether or not to offer a mortgage loan. To know what to expect when applying for a VA loan, you should calculate your DTI. To do so, add up all of your monthly debt expenses. This will include the following:
- Mortgage or rent
- Car payments
- Credit card debt
- Student loan payments
- Personal loans
- Alimony
- HOA fees
- Utilities
- Child care payments
- Any other outstanding debt
After finding out how much debt you owe per month, divide the total debt by your monthly income. Use your before-tax income in your calculations. Multiply your total by 100 to find your debt-to-income percentage. Anything below 41% is a good ratio of DTI for VA loan..
What is the Maximum DTI Ratio for a VA Loan?
There is no maximum ratio of DTI for VA loan. Typically, VA loan lenders will expect your debt-to-income percentage to be around 41%. However, you can receive a VA loan if your ratio is higher than this percentage.
DTI is not the only factor that is used when determining eligibility for a home loan. VA loan creditors will also consider your credit score and take an in-depth look at your finances.
What if You Have a High DTI Ratio?
It is possible to get a VA mortgage loan with a higher DTI ratio. If you have additional residual income or tax-free income you may still qualify.
Depending on the lender, they may have alternative evaluations for applicants with a high DTI. Some lenders will accept DTIs up to 50%. Often, lenders will require a higher percentage of residual income for DTI ratios above 41%.
DTI Ratio & Residual Income
Residual income is the amount of income you have after you’ve paid off your monthly debt. A higher amount of residual income is a good sign for lenders.
If you have a high DTI you might still be able to receive a VA loan. A larger amount of residual income will help balance the risk of an applicant with a high DTI.
The exact amount of additional residual income you’ll need to receive your home loan will depend on several factors. Often, lenders will expect 20% more residual income than your base income for applicants with DTI ratios above 41%.
However, the amount of residual income you’ll need will depend on where you live and how many dependents you have. It will also vary by lender. Talk to your lender to find out exactly how much residual income they require to offer a VA loan.
What is a Good Debt-To-Income Ratio?
Anything below 41% DTI is a good indication of your reliability to lenders. If your other financials are in good standing, you can expect to receive a VA home loan.
Strategies for Lowering Your DTI Ratio
To lower your DTI ratio you’ll need to either decrease your amount of debt or increase your monthly income.
Pay Off Debt
The fastest way to lower your debt-to-income ratio is to pay off any long-term debt. Decreasing the amount of debt you owe each month can quickly lower your DTI into a more appealing number for lenders.
Long-term debt continues to accumulate and increase through interest rates. Paying off what you can as soon as possible will help you pay less overall. Reducing long-term debt will put you in an overall better financial position for lenders.
If you are unable to pay off all of your long-term debt, you can still lower your DTI. Conduct an evaluation of your monthly debt to see if you can reduce any expenses. Lowering credit card charges or finding lower rent rates will also lower your DTI.
Increase Your Income
Increasing your monthly income will also decrease your DTI. As long as your debt does not also increase, your debt will become a smaller percentage of your overall income. Consider finding a higher-paying job, looking for a raise, or finding a way to make additional funds.
Find Another Lender
When all else fails, consider finding another VA lender. Each VA loan lender will have different requirements for awarding mortgage loans. Some will have less stringent DTI requirements than others. Some lenders might put more weight on other financial indicators than your debt-to-income ratio.
Consult VA Loans For Vets if you are having trouble finding the right lender for your VA home loan.
Do You Need Help with Your DTI?
Navigating the VA loan application process can be tricky. Luckily, we have dedicated experts ready to help you get started. VA Loans For Vets has years of experience helping veterans find their dream homes.
Give us a call at 602-908-5849 to have a trusted advisor walk you through the home loan process.
