VA Loan Debt-To-Income Ratio

A Brief Explanation of DTI Ratio for VA Loans

Veterans rightfully earn many great benefits for their service, including assistance with buying a home. But even with VA loans, there are qualifying requirements you must meet. One key factor is your debt-to-income ratio (DTI). The amount of your debt relative to your overall income can affect your chances of getting approved for a mortgage and the mortgage rate you qualify for. Let’s explore what DTI is, how it’s calculated, and what it means for you.

What Is DTI for VA Loans?

Debt-to-income ratio (DTI) measures how much of your gross monthly income goes toward debt payments. Shown as a percentage, DTI helps a VA mortgage lender verify that you’re committing an affordable amount of your income to your debts. In a sense, it helps protect you and the lender from taking on a loan you can’t afford.

• A high DTI means more of your monthly income goes to creditors to pay for your credit cards and loans.
• A low DTI means less of your income goes to pay off current debts.

For lenders, a lower DTI ratio means less risk when approving a new loan.

Front-End DTI vs. Back-End DTI

There are two types of DTI that lenders typically consider: front-end DTI and back-end DTI. Both ratios show how much of your income goes toward specific debts, which can affect mortgage approval and loan terms. Back-end DTI is usually the lender’s primary focus because it provides a complete picture of your financial commitments.

You’ll notice some standard monthly bills, like insurance or cell phone plans, are not specifically included in either the front-end or back-end DTI. Lenders and certain loan types may consider these living expenses and not debt obligations.

What DTI Is Required for VA Loans

The U.S. Department of Veterans Affairs (VA) does not set a firm maximum DTI for VA loans. But the VA suggests a back-end DTI of 41% as a guideline for lenders.

A DTI above 41% (and up to 50%) doesn’t mean you shouldn’t apply, but it may mean the is different. Typically, lenders can run mortgage applications through an automated underwriting system. With a VA loan, if that system shows a DTI of 41% or less, the application proceeds through the automated process. Anything above 41% gets flagged for a manual review, which means an underwriter fully evaluates your application.

You should calculate your DTI to get an idea of where you financially stand and to feel more confident about your VA home loan application.

How To Calculate Your DTI

Calculating your DTI takes a few minutes. Grab a calculator and something to jot notes on. Here’s a quick step-by-step process for figuring out your DTI.

1. Gather all your statements for recurring monthly debts and add them up. Remember, this could include your credit card bills, car payments, personal loans, etc.
2. Add up all of your household income. This can include your salary, your spouse’s salary, interest and dividends, VA disability, etc.
3. Divide your total monthly debts by your total monthly income. Then, multiply by 100 to get your DTI percentage.

DTI Example: $2,000 (total monthly debt) / $5,000 (total monthly income) = 0.4 x 100 = 40%

In this example, the DTI is just below that 41% guideline, increasing your chances of faster approval. Remember, being above 41% doesn’t mean you can’t get a mortgage—VA loans have exceptions that might make qualification possible up to 50% DTI.

What if Your DTI Ratio Is More Than the Acceptable Limit?

A DTI ratio above the VA’s suggested 41% doesn’t prevent you from getting a mortgage. In fact, the VA notes that lenders can approve higher DTIs if other factors show a strong overall financial profile. These factors may include:

• Residual income: Money you have left over after paying your bills is called residual income, and it shows the lender you can manage your money well.
• Credit score: A high credit score shows the lender that you pay your debts on time and would bring less risk.
• Small housing cost increase from current payment: Lenders may be more willing to approve a loan if you’re going from a housing payment of $1,200 to one that’s $1,300, for example.
• Tax-free income: For veterans and active-duty service members, this might be military allowances or disability benefits.

How To Lower Your DTI Ratio for a VA Loan

There are ways you can reduce debt and lower your DTI ratio that may help with VA loan approval:

• Pay it down: The first way is to pay down your debt, starting with the credit cards with the highest interest rates. If you can, try making more than the minimum monthly payment to pay off debt faster. Finally, you could consolidate your debt into a single payment with a lower rate (with a home equity loan or a cash-out refinance) to lower your monthly expenses.
• Don’t add new debt: Try to hold off on making big purchases, like a car, until after you get approved for a mortgage. Remember, adding new debt without increasing income will raise your DTI ratio.
• Get a co-borrower: You can add eligible co-borrowers to your loan application. The VA has strict requirements for who can be a VA loan co-borrower, primarily requiring co-borrowers to be immediate family members,. You can also have another veteran become a co-borrower, so if a parent or sibling served, that could be a great option.
• Increase your income: Having more money coming into your bank account each month means your DTI ratio will go down. One way to do this is for you or your spouse to bring in additional income. Whether negotiating for a raise, taking on a side job, or turning a hobby into a profitable business, you may have untapped options for boosting your household income.

Remember, your DTI shows how much of your income goes toward monthly debt payments. If you can cut the amount you pay each month, you can reduce your DTI and increase your chances of benefiting from better mortgage rates and terms.

Final Thoughts: How DTI Impacts VA Loan Eligibility

With every mortgage you apply for, including a VA loan, the lender will consider your DTI ratio. With a VA loan, the VA recommends a maximum DTI of 41% but allows for veterans to qualify for a home with a slightly higher ratio. This percentage helps lenders determine whether you can comfortably take on additional debt and repay it according to the loan’s terms. If you don’t meet DTI guidelines, it doesn’t automatically mean you won’t get a loan. Freedom Mortgage can work with you to lower your DTI and explore other options for getting a new home. Check out your eligibility for a VA loan today and get prequalified.