If you are trying to get approved for a VA loan, but have a high DTI, you may find it difficult. Even though the VA doesn’t put a lot of emphasis on debt ratios, they do play a role. Ultimately, if your debt ratio is too high, you won’t have enough disposable income to qualify for the loan. The disposable income is where lenders really focus. They want to make sure you have enough money to cover your bills without sacrifice. The disposable income and DTI often go hand-in-hand.
Dealing with a High DTI
Does it mean that if you have a high DTI that you won’t ever get a VA loan? It doesn’t. You may have to do some adjusting one way or the other in order to make it work, though. Following are the top ways to make it work:
- Reduce your debts – The fewer debts you have, the lower your debt-to-income ratio. But, this won’t happen overnight. If you have a lot of debts right now, focus on which ones you will pay down first. How you pay down your debts is a matter of personal preference. Some people like to focus on the smallest debts first so that they see progress right away. This helps to keep them motivated. Other people prefer to hit the largest debts first as they often have the largest impact on the DTI.
- Increase your income – It may be easier to reduce your debts than increase your income, but it may be a possibility. You can take on a part-time job at night or start a side gig that you can do from home. Keep in mind, though, lenders cannot use this income for qualifying purposes until you have the same part-time job or side gig for two years. In some cases, it may be easier to take the extra income and pay the excessive debts down to help reduce the debt-to-income ratio.
Change Your Purchase Price
If you don’t have the resources to pay down your debt or increase your income, you have another option. You can lower your target purchase price. The less you spend on your home, the lower your debt ratio will be. In some cases, you may not have to change the amount you borrow all that much. You should talk to your lender to see where your debt ratio lies to see just how much you should shave off the potential purchase price.
If you aren’t happy about buying ‘less home,’ you can make a down payment on the home. Even though VA loans don’t require you to make a down payment, you are allowed to make one. This will decrease the amount of money you must borrow for the loan, which lowers your debt-to-income ratio. The VA does allow you to accept gift funds from friends and relatives. This takes the burden of needing to come up with more money off you while still allowing you to purchase the home you want.
Gather Compensating Factors
One final way to get the approval you need is to come up with compensating factors. These are things the lender can look at and feel good about your risk level rather than nervous. A high DTI is serious business for a lender. It lets them know that you are overextended and may not make your mortgage payments on time. This is the last thing the lender wants to see.
But, with the right compensating factors, you can make up for this issue. The most common compensating factors are:
- High credit score – If you can show the lender that you have a credit score above what the VA requires, they may see you as a good financial risk. A high credit score means that you handle your finances responsibly, even if you have a large number of debts.
- Reserves – VA loans don’t require you to have assets on hand, but they can help you qualify. Lenders look at any liquid assets that you don’t use for your down payment or closing costs as reserves. They measure the amount based on the number of months the money will pay your mortgage payment. The more money you have, the better your chance of approval.
- Stable employment and income –Holding the same job for many years, could also help your chances of securing a loan with a high debt ratio. Lenders like stability in employment and income as it shows predictability in terms of being able to make your mortgage payments.
A high DTI doesn’t have to mean that you can’t get a VA loan. It will make things slightly more difficult, but it won’t be impossible. You just have to be willing to work with the lender by showing him compensating factors or by thinking outside of the box. Do you have a way to make more money? Can you pay off some debts? Are you okay with lowering how much you can afford to borrow? These are questions you must ask yourself to determine the right step for you.