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.
What is a DTI ratio?
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:
- Monthly debt is money you owe each month. Typically, those in debt owe money for credit cards, personal loans, student loans, auto loans, and so on.
- Gross monthly income is the money you make each month before taxes or deductions. This includes income from your primary occupation and additional income from disability, social security, child support, alimony, and so on.
What Is an Accepted DTI Ratio?
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.
What is the debt-to-income ratio for a VA loan?
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.
The Role of Residual Income in VA Loans
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.
Varying Residual Income Limits
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.
How DTI and Residual Income Connect
As your DTI changes, so does your residual income. For example:
- If you live in or are purchasing in the Northeast region, have a family of three (e.g., you, a spouse, and a child), and your proposed loan amount is $200,000, you must have a residual income of $909 a month or higher.
- If you have a residual income of $920 and take out a new credit card with a monthly minimum payment of $25, your residual income is $895, which falls below the $909 limit. Therefore, you would be ineligible to qualify for the loan.
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
Strategies for Lowering Your DTI Ratio
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:
- Practice excellent credit habits. Pay off your cards on time, remain below the 30 percent utilization rate, and do not open new accounts before applying for a mortgage loan.
- Pay off existing debt. The easiest way to bring down your DTI ratio is to have less debt. Be sure to work at paying larger debts, such as credit cards, student loans, and auto loans.
- Provide employment history. A solid work history shows your lender that you’re employable and financially reliable.
- Put down a sizable down payment. A larger down payment will lower your monthly mortgage payment, meaning you’ll have less overall debt per month.
- Have a strong asset reserve. An asset reserve means you have funds to contribute to your mortgage if something happens to your employment.