Your debt-to-income ratio plays a big role in the VA loan process. It will determine whether you qualify, the size of the loan you can get, and the amount of residual income you’ll need.
Typically, you’ll need a DTI of 41% or lower to be eligible for a VA loan. But some mortgage lenders are more flexible — so it’s possible to qualify even if your DTI isn’t perfect.
See if you’re eligible for a VA home loan. Start here (Apr 12th, 2023)
What is DTI?
DTI stands for debt-to-income ratio — a calculation of your monthly debts compared to your monthly income. Lenders use DTI to determine how much you can comfortably afford to pay on your mortgage each month.
Technically, there are two types of DTI calculations they might use:
- Front-end DTI: This is just your housing debts (your projected monthly mortgage payment, insurance, taxes, etc.) divided by your gross monthly income.
- Back-end DTI: This is a more holistic DTI based on your total monthly debts. You calculate it by adding up all your monthly payments — mortgage, car loans, student loans, credit cards, etc. — and then dividing that number by your monthly earnings.
In the case of VA loans, lenders only consider the back-end DTI — or your total debts compared to your income.
What is the maximum allowable DTI for a VA loan?
VA loans allow for a maximum 41% back-end debt-to-income ratio. This means your total monthly debts, including your projected VA mortgage payment, can’t exceed 41% of your monthly pre-tax income.
Remember, your total monthly debts will include things like:
- Minimum credit card payments
- Student loan payments
- Car loan payments
- Personal loan payments
Your new VA mortgage payment, including property taxes, homeowners insurance, interest, and any required HOA dues, will also factor into your debts, so keep this in mind when searching for a house.
If your DTI is higher than this 41% threshold, don’t fret just yet. There may still be a way to qualify for a VA loan.
Typically, a VA lender can allow for a higher DTI ratio if you have enough residual income (leftover money after fulfilling your monthly debt obligations) or your DTI is high due to tax-free income. We’ll go into this more later on.
See if you’re eligible for a VA home loan. Start here (Apr 12th, 2023)
How DTI ratios are calculated for a VA loan
Since VA lenders use your back-end debt-to-income ratio, the first step to calculating your DTI is to add up all your monthly debt payments. This will include the minimum payments on all credit cards, student loans, car loans, personal loans, and more. VA lenders may also take into account other bills, like monthly childcare or transportation costs.
Then, the lender will add in your projected monthly mortgage payment — which includes the interest, taxes, and insurance — as well as your estimated utility bills. This is calculated by multiplying the property’s square footage by 0.14.
Finally, they’ll divide that total number by your gross income — the pre-tax earnings your household brings in on a monthly basis. Here’s an example:
| Min. Credit Card Payments | $150 |
| Student Loan Payments | $100 |
| Car Payments | $500 |
| Child Care Costs | $350 |
| New Mortgage Payment | $1,500 |
| Estimated Utility Costs | $300 |
| Total Monthly Dept Payments: | $2,900 |
| Pre-tax Monthly Income: | $7,000 |
| DTI: | 41% |
In this case, your DTI would be right at 41%, meaning you can likely qualify for a VA loan.
DTI ratio & residual income
All VA loans require a certain amount of residual income — or discretionary income that’s left over after covering your monthly debts and mortgage payment. The exact amount you’ll need varies, but your loan amount, household size, and location all play a role.
Your DTI can impact your residual income requirement, too. If your DTI is over the 41% threshold, for example, you’ll need significantly more in residual income — 20% more, to be exact — in order to qualify for the loan.
Here’s an example: Say the typical residual income requirement for a VA loan in your area (and for your loan and family size) is $1,500, meaning you need $1,500 on top of what’s required for your mortgage and other monthly expenses.
If your DTI were to come in over 41%, that residual income requirement would jump to $1,800 — 20% more. If you don’t have that $1,800 in discretionary income, you’d need to lower your DTI or increase your income before you could qualify for the mortgage.
What if you have a high DTI ratio?
If your DTI is higher than 41%, the above residual income rule may be able to help you. With 20% more in residual income per month, you can qualify for a VA loan even with a higher-than-allowable debt-to-income ratio.
However, if coming up with that extra residual income is not possible, you can also work on improving your DTI instead.
To do this, you would need to either reduce your debts (pay off credit cards, make an extra car loan payment, etc.) or increase your income. This might entail getting a side gig, having your spouse seek employment, or, if they’re already employed, asking for a raise or more hours.
Searching for a lower-priced home or making a larger down payment can help, too. The less you need to borrow, the smaller your mortgage payment will be. Since your mortgage payment is a big part of your back-end DTI, buying a more affordable home can help lower it, improving your chances of qualifying for the loan.
See if you’re eligible for a VA home loan. Start here (Apr 12th, 2023)
Debt-to-income ratio FAQ
What is a good debt-to-income ratio?
If you’re applying for a VA loan, your safest bet is a debt-to-income ratio under 41% — meaning your total monthly debts take up 41% or less of your pre-tax income. Though some lenders will allow you to qualify with DTIs higher than this threshold, they also require you to have 20% more in residual income per month.
What is the max debt-to-income ratio lenders will usually accept?
With VA loans, the maximum DTI is technically 41%, though lenders can go higher than this if they wish. Some will go as high as a 50% DTI, though you will need extra residual income — or discretionary income after covering your monthly debts — in order to qualify.
What is the required residual income calculation when DTI exceeds 41% for a VA loan?
All VA loans require residual income, which is the income left over after you’ve met all your monthly debt obligations (plus your mortgage payment, utilities, child care costs, etc.). The exact amount varies by location, household size, and loan amount.
If your DTI exceeds the recommended 41% maximum, then you’ll be required to have 20% more in residual income to qualify. So if you were initially required to have $1,000 in residual income, but your DTI comes out to 45%, you’d need to have $1,200 in residual income instead. Only then could you qualify for the loan.
What if your DTI ratio is more than the acceptable limit?
In the event your debt-to-income ratio is higher than 41%, you have a few options. First, you can qualify with additional residual income. In order to be approved with a higher-than-41% DTI, you’ll need at least 20% more than your base residual income requirement.
If this isn’t possible, you can work on reducing your DTI before applying for your loan. There are several ways to do this, including paying down your debts (car loans, student loans, credit cards, etc.) or increasing your income. Having your spouse seek employment, ask for a raise, or take on more hours can help, as can taking on a side hustle or extra job — even just temporarily.
See if you’re eligible for a VA home loan. Start here (Apr 12th, 2023)
Source: militaryvaloan.com