Debt-To-Income Ratio: Does it Make Any Difference to VA Loans?



VA loan was officially introduced through the Servicemen’s Readjustment Act (GI Bill of Rights) on June 22, 1944. It was specifically designed to offer housing assistance to the Veterans. The VA loan program allows the Veterans to qualify for federally guaranteed home with zero down payment.

When do you qualify for the VA loan?

The popularity of the VA loan has increased over the years because of the various benefits it offers to the homeowners. However, as the name suggests, not all people can qualify for VA loans. You can qualify for the VA loans under the following conditions:

You have been an active-duty Veteran with minimum 90 days of service during wars.

You have offered active service for 181 consecutive days during peacetime.

You’re a Veteran having at least 41% debt-to-income ratio.

The last eligibility criterion is often ignored or overlooked by the Veterans, which leads to frequent rejection of the loan applications. Read along to know about the crucial role played by debt-to-income (DTI) ratio in VA loans.

What is the acceptable DTI ratio for VA loans?

The debt-to-income ratio determines if you can qualify for VA loans. The acceptable debt-to-income ratio for a VA loan is 41%. Generally, debt-to-income ratio refers to the percentage of your gross monthly income that goes towards debts. In fact, it is the ratio of your monthly debt obligations to gross monthly income.

Calculate the money you spend on house maintenance, tax, insurance premiums, car loans, credit card bills, educational loans, etc. Thereafter, calculate the amount you earn every month. Finally, calculate your debt-to-income ratio using a calculator.

How can you calculate your debt-to-income ratio on your own?

Have a look at the following example and calculate your DTI ratio before applying for a VA loan.

Your annual income is $48,000.

You divide it by 12 to get your monthly income – $48,000/12 = $4000

Your monthly income is $4000

Now, the monthly income is multiplied with 0.41 – $4000 x 0.41 = $1640.

If your monthly debt obligation is not more than $1640, then you’ll be able to qualify for VA loan.

What if your DTI ratio is more than the acceptable limit?

The mortgage underwriters will make a thorough inspection of your loan application if your debt-to-income ratio is more than 41%. However, it does not mean that your VA loan application will be rejected straightway. You can still qualify for VA loan under the following circumstances:

The DTI ratio is more than the permissible limit due to tax-free income.
The residual income surpasses the acceptable limit by around 20%.

If your VA loan application is approved by the underwriter even after crossing the 41% benchmark, then he has to justify his action. The underwriter has to explain the reasons behind approving the loan application.

How can you lower your DTI ratio and qualify for VA loan?

One of the easiest ways to reduce your debt-to-income ratio is to cut down your debt load. You can do so by paying off your debts as soon as possible. You can try various do-it-yourself debt repayment methods such as debt snowball or debt avalanche to reduce your debt obligations. You can browse through popular financial websites and know about these methods in details. Otherwise, you can consider professional debt relief programs to reduce your financial obligations.

If you really can’t pay off your debts and lower your DTI ratio, then a co-signer may be able to offer a solution to your problem. Unlike the conventional mortgages, you simply can’t ask any family relative to become a co-signer on the loan. Your legally married spouse or unmarried military members can co-sign on the loan.

Finally, if you’re unable to find a co-signer on the loan, then perhaps it is time to wait for a few months. Organize your finances, gather all the necessary documents and get to know about all the loan requirements before applying for a VA loan.

Kevin Craig is a financial writer by profession and is associated with a few online financial communities including Oak View Law Group. He has written and published several articles on different financial topics such as mortgage, debt, credit, and more.

Author

Kevin Craig

Comments

  1. Kenneth R    

    Kevin,

    Please never tell someone to get a Co-signer. If a veteran can’t get the loan themself they should never never put another person in a position of having to paying if they don’t. I would tell a veteran to simple wait until you have paid your accounts lower better yet get debt free increase your savings. Then pay a larger down payment only get the loan for 15 years. It will pay off in the long run.

    Kenneth R.

  2. dick    

    I’m also a Realtor and unless you get a great deal on a house-rent until this economic uncertain situation rights itself. Congress is not addressing it properly yet!

  3. Tim    

    They left out a key thing here…. even if your debt to income ratio is way below 41% if your credit score isn’t at least 640 as well, you will still be turned away from using your VA loan…

  4. JENNIFER    

    HI, HAVE A QUESTION ABOUT THE VA LOAN . MY HUSBAND IS ELIGIBLE HAS HIS CERTIFCIATE , AND WE HAVE TRIED ABOUT THREE TIMES NOW AND WERE DENIED . THEY SAID HIS CREDIT SCORE WAS NOT HIGH ENOUGH. DOE’S IT HAVE TO BE AT A CERTAIN RATING ?? OUR CREDIT IS NOT THE GREATEST DO TO PREVIOUS MARRAGIES …… WHAT CAN WE DO TO GET ON THE RIGHT TRACK SO WE CAN BE ACCEPTED FOR A LOAN??

  5. Mark    

    As a veteran who has used his VA home loan benefit, I agree with “Kenneth R”. Never have someone co-sign your VA Loan. You should whittle down if not close out all your debt if possible before moving forward with the financing. If you can’t do it yourself, it’s not meant to be for the moment. Continue to pay down your debt until your financial health is well enough to venture into the market. Furthermore, depending on where you live, this may be the ideal time to start looking and comparing prices. The housing market is flooded with single family homes; it’s a buyers’ market. However, property values may continue to drop due to the excessive housing glut. This may take another 2 to 3 years to settle out. But once the housing inventory on new and previously owned homes starts to dry up, interest rates and prices will start to go up as supply diminishes and demand increases. It’s all in the timing. You do not want to pay more for something that may lose some value over the next year or two. The bottom line is that you want to ensure that you are in the best financial health possible when applying for a VA Loan.

  6. Lem Bray    

    If the VA inspectors are too rigid in an area you can’t get a loan on anything because the sellers first choices — cash or conventional loan take the houses you can afford off the market before you can get an underwriter’s GFE on a given property. Been shopping almost two years. Qualified for up to 230K but it is useless to me.

  7. KellyHomeowner    

    As a recent home purchaser with a VA loan, I would like to mention that credit scores, proper bank documentation, as well as other income related documents are necessary to qualify. This article implies that 41% DTI qualifies a VA member along with the service criteria. However, the VA paperwork process is lengthy and strict. The VA loan process not only to protects the VA but the future homeowner as well.

    Depending on the amount of a VA loan, you may be required to make a downpayment if your loan amount exceeds the area’s VA loan limits, known as a jumbo loan. Utimately, the selected mortgage company/lender has the final approval on whether it will underwrite a loan and determine whether a buyer is financially qualified, not the VA. The DTI and service requirements are just the first steps.

  8. Treva R. Woods-Calhoun    

    I’m interested in a VA Loan for a single family home. Unfortunately, I’m repeatedly being denied based on credit score is not high enough. Currently, I have one major bill with the Navy Exchange and that’s it. Monthly income is $1927. Last reported credit score was/is 583. Do I need to payoff my debt with the NEX before I can qualify for a VA Home Loan with zero downpayment and a reasonable interest rate? Can a financial advisor help me? Or, refer me to an advisor in my area. Your support and assistance is greatly welcome and appreciated. Look forward to hearing from someone via email: 46Racine@att.net

    1. James Oneill    

      You don’t need to pay off the outstanding balance to the NEX unless the balance is maxed or over 50% of your available credit with AAFES. If your AAFES card is fairly new, it will take time for you to build up your credit score. One of the highest factoring percentages goes to payment history (35%) the other goes to debt to credit ratio 30% (how much available credit you have compared to total lines of credit) A few things that have helped me 1. open at least 3 revolving accounts (Mastercard, Visa, Discover etc.) and keep them all below 50% of their total credit limit. 2. Open an installment loan if you don’t already have one (car loan, personal loan) 3. Always pay your bills on time and never ever miss a payment. Your score will go up gradually within a year, high enough to become eligibel for a VA loan. The longer you keep your accounts open and paid on time, the higher your score will get. Remember, you don’t necessarily have to get into a lot of high debt. 3, 500 dollar limit cards and a small used auto loan is great to start.You must be able to establish a good payment history with the debts you manage. You must be able to show creditors that you can responisbly manage all debts by not overextending yourself by maxing out all available credit.

  9. Jenny    

    I work in the mortgage industry and I agree with Kenneth. A co-signer on any loan is a unwise in a situation where your DTI ratio is above acceptable limits for that loan program. Wait until you are able to address the debt significantly and then make a move.

  10. Jon    

    Kevin,
    Are these federal, VA requirements, (specifically the debt to income ratio) or is that somethign that is set by the lender? I checked here, at the VA webpage for home loans, and didn’t see any mention of DTI: http://www.benefits.va.gov/homeloans/elig2.asp
    Can you clarify? Is this federal law? If not, this shouldn’t be on a VA webpage.

  11. Frank H. Nette Jr.    

    On several houses considered VA Home Loan…so much confusion…lenders that may often have additional qualification based on FICO Credit Score. Some as low as 630-680 minimum scores in todays economy, yet some even higher or set minimum on what dollar amount they would originate a VA Home Loan. VA Forclosures? Not many on the market but the whole process has been outsourced to Bank Of America and they have their own criteria. Wasup Wit Dat? Kinda like to downsize and the way the market it I gotta keep this one, cause nobody want to pay what it’s worth. Then there is the whole fiasco of appraisels based on last 6 month of market sales vs. tax assessments not being in sync with reality, like the Certificate of Eligibility.

  12. pw    

    To all my fellow veterans. Our government has given us a great opportunity for home ownership. take advantage of this. My wife and I wanted to buy our first home in san diego but were affraid our credit was questionable and income too low. I searched the internet for va loans and found this site. http://va-mortgage.org

    the loan officer called me shortly after inquiring about loans. not only did he walk my wife and i
    throught the entire process, he got us a loan for a great rate. other people tried to reem us. this man chris murphy was patient and did us right. now we own our first home and couldnt be happier. I suggest checking them out.

    sincerely
    paul w.
    http://va-mortgage.org/

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