The Veterans Affairs (VA) Home Loan Program offers housing assistance to veterans by allowing them and their families to qualify for federally guaranteed homes with zero down payment.
Although this program has benefited many of our country’s military personnel, like other loan programs, there are several requirements that the borrower must meet to qualify for a loan. Among these factors is a debt-to-income ratio.
So what are the standards for a debt-to-income ratio for a VA loan? We’ll get into this topic and others in this article.
The Consumer Financial Protection Bureau defines a DTI ratio as “all your monthly debt payments divided by your gross monthly income.” In addition to other qualifiers, your DTI ratio is used by lenders to determine your level of risk if you were to take on a mortgage.
The two key terms in this definition—monthly debt and gross monthly income—are defined as the following:
This is a common question, and the answer depends on several factors. Your DTI ratio is ultimately determined by the type of loan and the lender you choose.
In some cases, other qualifying factors may also impact your DTI ratio. For example, having a higher asset reserve can, in some cases, help you qualify for a loan even if your DTI ratio is higher than the standard. A large sum in your asset reserve could make you a safer financial investment to your lender.
Again, this will be dependent on your lender and not a conclusive exception to the rule.
VA loans do not have a DTI threshold. To qualify for a VA loan, you don’t need a specific DTI ratio. However, lenders generally like to see a DTI ratio under 50 percent.
In the case of VA loans, your DTI ratio and your residual income are interconnected and will impact each other.
Residual income is the amount of income left over after your monthly obligations are paid and social security, federal and state taxes, and Medicare are taken out of your gross monthly pay.
To determine your monthly residual income, your lender will find your take-home pay by multiplying your gross monthly income by the current local and federal tax rates, social security rates, Medicare rates, and other state deduction rates—such as the MA Family Medical Leave Act deduction—based on the state you live in or plan to purchase in.
From there, they will deduct your monthly obligations—such as auto loan payments, student loan payments, and other existing loan payments—and the proposed monthly mortgage payment.
The remaining number is your residual income, which is essentially the amount of income you retain each month after paying all your bills.
You must meet the residual income limit set by the VA for your particular scenario. Residual income limits vary by your region in the U.S., family size, and proposed mortgage loan amount. Check out these tables that list residual income by region to see what limit you need to meet.
As your DTI changes, so does your residual income. For example:
An important factor in the residual income calculation is your proposed monthly mortgage payment. If the loan amount or interest rate changes or your homeowner’s insurance premium is slightly different than anticipated, it will change your residual income amount.
Homeowner’s association (HOA) fees are also factored into this calculation if you own or plan to purchase a condominium or home located in a planned unit development with HOA fees.
If you realize your DTI ratio is higher than the standard or your residual income is lower than the required amount, no need to worry. You can look at strengthening the other factors that are required for qualification:
Understanding debt-to-income ratios, residual income, and the many qualifiers you need to meet to receive mortgage approval can seem like a lot.
That’s why you need the right professionals in your corner, including Loan Officers, who will answer your questions, navigate the intricacies of VA loans, and ultimately help you fund your dream home.
Take the next step and contact one of our Loan Officers today!