VA loans are a unique program. Not only are they for veterans that served in the military, but they have flexible guidelines. You won’t find the rigid guidelines of a conventional loan with VA financing. Instead, you’ll find flexible rules that make it easy for veterans and their spouses to own a home.
Of utmost concern for most borrowers is the debt to income ratio. Just what do VA lenders require? Is it hard for veterans to get a loan?
The Required Debt to Income Ratio
You might be shocked to learn that the VA doesn’t have a specific debt to income ratio you must follow. That’s because they rely on your disposable income instead. The VA has strict guidelines when it comes to how much money you must have left at the end of the month in order to qualify for VA financing. The VA feels that this is a better measure of what borrowers can afford. They feel that if you have to sacrifice your daily cost of living that you may end up defaulting on your VA loan.
The VA sets their disposable income limits based on the cost of living in your area and the size of your family. This isn’t to say, though, that they don’t look at your debt ratio. They just set looser guidelines. For example, they don’t have a specific housing ratio you must have. Instead, they look at the total picture. They want to know your total debt ratio. This is the ratio that measures your total debts, which include your principal, interest, taxes, insurance, car loans, credit card debt, personal loans, and student loans to your gross monthly income.
As a general rule, your total debt ratio shouldn’t exceed 41% of your gross monthly income. This is in addition to the need to meet the VA’s disposable income guidelines. This is a much more forgiving maximum than conventional loans, which allow only a 36% total debt ratio.
What Debt Ratio Works For You?
Something you should really consider, though, is what debt ratio you are comfortable with as you are the one paying the mortgage. If you make $5,000 a month, are you comfortable spending $2,050 of it on your monthly obligations?
It’s best if you look at this on paper. Put the numbers into your budget and see how it looks. Do you currently have a housing payment? Whether you pay a mortgage or you rent, consider how much different the VA loan payment would be compared to what you are currently paying. Keeping the payment shock, or the difference in your housing payments to a minimum can help to decrease your risk of default.
Just because the VA allows a DTI up to 41% or higher, in some cases, doesn’t mean you have to take a loan for that much. Only you know what you can comfortably afford. If you want to spend less, do so. If you are comfortable taking the higher payment and stretching your budget, the VA will let you do that too. It’s all up to you.