Veterans with eligibility for a VA home loan can secure a no down payment loan. Before a lender approves you, though, you must prove you can qualify for the loan. Among several factors, your debt-to-income ratio must match the VA’s requirements. Here we discuss its importance and how you can qualify.
The VA’s Max Debt-to-Income Ratio
If there is one unique aspect about VA loans, it’s how they look at the debt-to-income ratio. Most loans require a specific housing and total debt ratio. Your housing ratio is the total housing payment including principal, interest, taxes, and insurance. FHA loans allow an upfront ratio of 31% and conventional loans allow 28%, for example. Your total debts make up your total debt ratio. This includes the housing payment along with other monthly obligations including:
- Credit card payments
- Student loans
- Auto loans
- Personal loans
Each loan program has a required maximum for the back-end ratio as well. The FHA allows as much as 43% and conventional loans allow 36%.
So how does the VA differ? They don’t look at your front-end ratio. They only concern themselves with your total debt ratio. Your max debt-to-income ratio for VA loans equals 41%. Does this mean if you have a DTI of 42% you won’t qualify? It depends on the lender. Some lenders allow higher DTIs. However, in exchange, you’ll need additional disposable income. We discuss this below.
The VA and Disposable Income
The VA has one of the only programs that look at disposable income. Any money left over after you pay your mortgage and monthly debts is disposable income. The VA has strict requirements on how much you need. They base it on the area you live and the size of your family. Larger families need more money for daily living costs. Families living in higher cost areas also need more.
Here’s a quick example for a family of 5:
- Northeast $1,062
- Midwest $1,039
- South $1,039
- West $1,158
The differences aren’t huge, but they are there. Now, if you have a debt ratio exceeding 41%, you can overcome it with more disposable income. The VA states if you have 20% more than the required disposable income amount, you may qualify with a higher DTI.
Let’s say you have a 42% debt ratio and you live in the West with a family of 5. You’d need $1,389 per month in disposable income to qualify with the higher debt ratio. The VA assumes the higher disposable income makes up for your higher DTI.
What Income Counts in Your DTI?
Determining your DTI involves figuring out your total income. The VA uses your gross monthly income or income before taxes. You can use many types of income. Although, you are not legally bound to disclose certain amounts – it’s your choice. Following are some of the most common types of income used:
- Hourly pay
- Self-employment income
- Rental income
- Dividends from investments
- Child support
You must prove you receive the income on a consistent basis. A 2-year history usually suffices. You can prove receipt with bank statements or statements from the paying company (employer, stocks, etc.).
What Debts Count in Your DTI?
Not every debt you pay each month counts against your debt ratio. Specifically, only those debts that report to the credit bureau count. The most common include:
- Credit Cards
- Personal loans
- Student loans
- Auto loans
- Mandated child support
- Mandated alimony
Other Factors the VA Considers
The VA focuses on your disposable income. But, you must also meet other factors to qualify for the loan program.
- Credit score of at least 620, although this varies by lender. Some lenders require higher credit scores than others.
- You shouldn’t have any collections within the last 12 months.
- You can’t have any defaulted federal loans in your past.
- A Chapter 7 bankruptcy must be discharged at least 2 years ago
- A foreclosure must be more than 2 years prior to application for the VA loan
No Down Payment
A huge benefit of the VA loan is the lack of need for a down payment. The VA doesn’t require veterans to put any money down. In exchange, though, you pay an upfront funding fee. This helps the VA continue to provide this flexible mortgage program. They use the funds received from the VA loan to guarantee loans. If a VA borrower defaults on the loan, the VA pays the bank back the money they lost. Because the VA program is self-funded, they need the upfront funding fee to help them stay solvent.
Right now, veterans using the loan for the 1st time, pay 2.15% of their loan amount. For example, a borrower with a $150,000 would pay $3,225. You only pay this fee one time at the onset of the loan. However, you can roll it into the loan amount if you can’t pay it upfront. The VA loan is unique because they don’t charge annual mortgage insurance. Other government programs, such as the FHA and USDA loans do charge annual mortgage insurance in addition to the upfront funding fee.
Keep in mind, every time you take out a VA loan, you’ll pay the funding fee, though. The amount differs based on the number of uses. However, if you use the VA IRRRL program, which is a streamline refinance program, you only pay 0.5% of the loan amount.
The VA loan offers very flexible benefits for veterans. You don’t have to focus on your debt-to-income ratio for this program. But, they do offer one of the most flexible guidelines. This may help veterans just starting out in life. You may have bad credit, a high debt ratio, or a combination of both. With the guarantee the VA provides, banks are more willing to provide the loan to “riskier” borrowers. Check out your eligibility for VA loans today!