Debt to Income Ratios for VA Loans
VA Debt-To-Income Guidelines According to VA guidelines, borrowers and or their spouse must qualify according to set debt ratios which are used to determine whether the borrower can reasonably be expected to meet the expenses involved with home ownership. Usually, 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 is buying a $200,000 home, no money down. With Principal and Interest, Taxes, and Insurance (PITI), Andy’s monthly payment might be around $1200 (rates change daily, so this number could change too). $45,000 income per year is $3750 per month. Let’s say Andy also has a $300 per month car payment and another $200 in student loans. Andy’s debt-to-income ratio, or DTI, will be 45%, calculated like: Debts: $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 per month. 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 over 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, ect. 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 Dept-To-Income Ratio:
Before applying for a VA home loan in Colorado look at the following example then calculate your own 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 with 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 then you’re well on your way for qualifying for a VA loan.
How to Reduce my Debt-to-Income Ratio
It’s pretty simple really, either you earn more money or decrease your debt load. The easiest way to decrease 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 at possible. It may take some time to organize your finances, be patient you are well on your way to obtaining a new home.