If you are a veteran with an honorable discharge and enough time served, you may be eligible for a VA loan. This method of financing provides veterans with 100% financing up to $453,100.
Does that mean that you can obtain a loan for the full $453,100? It doesn’t. It only means that you are eligible for that amount, but you are not qualified for it until you prove what you can afford. Like any other loan, the lender needs to make sure you can afford the mortgage payments comfortably.
Keep reading to see how you determine how much VA loan you can afford.
Watch Your Debt Ratio
Your debt ratio plays an important role in deciding how much VA loan you can afford. The VA doesn’t put a lot of emphasis on the debt ratio, but enough to help you determine if you can qualify for a loan.
Unlike other loan programs, the VA doesn’t require a specific housing ratio. Instead, they focus on your total debt ratio. They use the industry standard of a maximum 43% debt ratio. This means that your housing payment (principal, interest, taxes, and insurance) plus your other monthly consumer debts cannot exceed 43% of your gross monthly income.
You can figure your debt ratio by first looking at your gross monthly income. This is the income you make before taxes. If you receive a salary, you can divide your annual salary by 12 – that’s your gross monthly income. If your income is more complicated, you may need to look at your adjusted gross income on your tax returns for the last two years. Add those two numbers together and divide by 24 months. This is your gross monthly income for qualifying purposes.
Once you have your gross monthly income, you then need your total monthly debts. Make sure you include the potential mortgage payment. You can then use the following formula:
Total monthly debts/Gross monthly income = your total debt ratio
If it doesn’t exceed 43% with your new mortgage payment in it, you should be on your way to mortgage approval.
You Need Disposable Income
The VA has one unique qualifying factor that they require. They look at your monthly disposable income. This is the money you have left after you pay your bills each month. The VA focuses on this number to make sure that you have enough money for the daily cost of living. They feel that by focusing on this number, they can decrease the risk of default. The VA believes that when a homeowner is faced with choosing between paying their housing payment and sacrificing personal needs or skipping the mortgage payment and satisfying the person needs that the risk of default increases.
Your lender will look at your amount of disposable income that you have each month to tell you if you qualify. The amount that you need depends on the cost of living in your area as well as the size of your family.
Figuring in Your Other Qualifying Factors
The VA also requires lenders to look at your credit score and overall ability to pay the loan back. They trust that lenders will only provide VA loans to borrowers that show that they can comfortably afford the loan by having adequate income, a decent credit score, low enough debts, and a stable job.
For example, even if you have a debt ratio below 43% and you have enough disposable income as required by the VA, you may not qualify for the loan. The lender will look at your credit score and your employment history.
Your credit score lets a lender know how financially responsible you are with your money. Do you pay your bills on time? Do you overextend your revolving credit? Do you have too many loans outstanding? The lender must look closely at these factors as well as your overall credit score to make sure that you are a good risk.
The lender must also evaluate your employment history. Do you have stable employment or do you change jobs often? If you do change jobs, do you have gaps in your employment? Do you stay within the same industry or are you all over the place?
A borrower with a sketchy employment history could be a high risk for default. Even if you have the best debt ratio and enough disposable income right now, if your employment history is unstable, a lender may not be able to give you a loan.
So how much VA can you afford? It depends on a variety of factors. The best thing that you can do is maximize your credit score, lower your debt ratio, and stabilize your employment. This will give you the best chance at affording the maximum loan that you need to buy a home.