VA Debt-To-Income Guidelines
According to VA guidelines, borrowers and their spouses must qualify according to set debt ratios, which determine whether the borrower can reasonably be expected to meet the expenses involved with home ownership.
Usually, the debt-to-income ratio refers to the percentage of your gross monthly income that goes towards paying off debts vs. your monthly income. The standard debt-to-income ratio for a VA loan is 41%. You can be approved with a higher debt-to-income ratio depending on your circumstances.
Specifically, a high residual cash flow can help you get approved with a higher debt-to-income ratio – here’s why.
Let’s take home-buyer “A” (for Andy), who makes $45,000 a year and buys a $200,000 home with no money down. With Principal and Interest, Taxes, and Insurance (PITI), Andy’s monthly payment might be around $1200 (rates change daily, so that this number could change too). $45,000 income per year is $3750 per month. Andy also has a $300 monthly car payment and another $200 student loan. Andy’s debt-to-income ratio, or DTI, will be 45%, calculated like this debt: $1200 (PITI)+$300 (Car)+$200(student loans) = $1700. Divide the debt, $1700, by the income, $3750, and you get 45.33%. Voila!
Now let’s look at buyer “Z” (for Zoe). Zoe is buying a $417,000 home with a no-money-down VA loan. Zoe’s payment will be around $2400. Zoe has a car loan for $500 per month and credit cards for $1000 per month, totaling $3,900. Zoe’s income is $8,600 per month. What’s her DTI? $3,900 / $8,600 = 45.34%. Andy and Zoe have the same DTI.
Now let’s look at residual income. After Andy pays all his bills each month, Andy will have $2050 left to live ($3,750-$1700=$2,050). This “left-over to live” money is what VA calls residual income. VA calculates this on every loan approval.
Now let’s look at Zoe, who will have $4,700 residual income ($8,600 income – $3,900) expenses. Zoe has more wiggle room at the end of the month (or more residual income). All things being equal, Zoe has a better chance of being approved with a higher debt-to-income ratio. Make sense?
To determine your debt ratio add up the money you spend on car loans, student loans, house maintenance, insurance premiums, etc. Next, calculate the amount of money you earn every month. Finally, calculate your debt-to-income ratio by using the following example as a template.
How to Calculate Your Debt-To-Income Ratio:
Before applying for a VA home loan, look at the following example, then calculate your DTI ratio.
- Your annual income is $60,000
- You divide it by 12 to get your monthly income – $60,000/12 = $5,000
- Your monthly income is $5,000
- Next, the monthly income is multiplied by 0.41 – $5,000 x 0.41 = $2,050.
$2,050 would be the cap of your monthly debt obligation; if it is within the acceptable limit, you’re well on your way to qualifying for a VA loan.
How to Reduce My Debt-to-Income Ratio
It’s pretty simple; either you earn more money or decrease your debt load. The easiest way to lower your debt-to-income ratio would be to prune your debt load. One way to do that would be to pay off your debt with a cash-out refinance are soon as possible. It may take some time to organize your finances but be patient. You are well on your way to obtaining a new home.
