One of the key financial metrics for lenders is the debt-to-income (DTI) ratio when it comes to getting a VA home loan.
The debt-to-income ratio is an underwriting guideline that looks at the relationship between your gross monthly income and your major monthly debts, giving VA lenders an insight into your purchasing power and your ability to repay debt.
For VA loans, lenders consider only the back-end ratio, which offers a more holistic look at your monthly debt-and-income situation.
Buying a home is an exciting milestone in life. For veterans and service members, VA home loans offer significant benefits like no down payment and flexible credit guidelines. However VA borrowers still need to meet debt-to-income (DTI) ratio standards set by lenders. This article will explain what DTI is, how it’s calculated for VA loans lender benchmarks, and tips for managing a high ratio.
What is DTI Ratio?
DTI ratio measures your monthly debts against your gross monthly income. It gives lenders insight into your financial health and ability to manage monthly payments.
There are two types of DTI
- Front-end DTI – Compares your housing expenses to income
- Back-end DTI – Looks at all monthly debt obligations
VA lenders only look at back-end DTI, which provides a comprehensive view of your financial obligations.
How is DTI Ratio Calculated?
When calculating DTI for a VA loan, lenders will include:
- Monthly housing payment (principal, interest, taxes, insurance)
- Other installment debts (auto, student loans, child support, alimony)
- Revolving credit card payments
- Utility costs based on home size
Some debts not counted toward DTI:
- Groceries, entertainment, cell phone bills
- Medical expenses, car/health insurance
- Charge-offs or collections not currently being paid
Income sources counted by lenders:
- Wages, salaries, bonuses, commissions
- Self-employment or rental property income
- Pension, social security, disability
Some income requires two years of history to be counted, like overtime or bonuses. GI Bill housing allowances also don’t count toward DTI calculations.
To determine the ratio, add up your monthly debts, divide by gross monthly income, and multiply by 100. For example:
- Monthly debts: $2,000
- Gross monthly income: $5,000
- DTI = $2,000/$5,000 = 0.4 = 40%
VA and Lender DTI Benchmarks
The VA doesn’t mandate a maximum DTI, but suggests lenders scrutinize loans above 41%. Most lenders set their own caps, often between 41-50%. Higher DTI loans may require strong compensating factors like excellent credit or significant assets.
Managing a High DTI Ratio
A DTI over 50% can jeopardize loan approval. Here are some options if your ratio is too high:
- Pay down existing debts to reduce monthly obligations
- Increase your down payment amount to lower the mortgage payment
- Seek a lower loan amount that fits your current income and debts
- Find a co-signer with stronger finances to boost the application
Meeting residual income rules can also help offset a high DTI. Residual income is money left after paying debts and housing. The VA requires a minimum based on family size and loan amount.
Borrowers with DTIs above 41% need 20% more residual income. This demonstrates you can still afford basic necessities despite high debt levels.
Tips for Maintaining a Healthy DTI
Here are some tips to keep your DTI ratio in check when applying for a VA loan:
- Pay down credit card and auto balances before applying
- Avoid taking on new installment loans if possible
- Request credit limit increases to lower card utilization
- Build emergency savings to cover unexpected expenses
- Stick to a budget that aligns with your VA loan amount
- Consider a 15-year mortgage term to reduce principal/interest
Carefully managing debts, credit, and expenses in the months leading up to your VA loan can help optimize your DTI. This gives you the best shot at approval on your ideal loan amount and terms.
The Importance of DTI Ratio
DTI ratio offers critical insight into a borrower’s financial standing. It demonstrates your ability to manage monthly payments and take on the long-term obligation of a mortgage. While not the only factor considered, DTI is a key underwriting guideline for VA loans.
With proper preparation and debt management, you can position yourself with a competitive DTI when applying. This will help smooth the path to buying your dream home or refinancing with a VA loan. Consult a lender early about your specific situation and steps to take in strengthening your financial profile.
How to Calculate DTI
| Car Loan | $200 |
|---|---|
| Student Loan | $150 |
| Child Care/ Child Support/ Alimony | $300 |
| New Mortgage Payment (PITI) | $1,200 |
| Utility Costs | $200 |
| Major Monthly Debts | $2,150 |
| Gross Monthly Income | $5,500 |
| DTI Ratio = | 39% ($2,150/$5,500) |
Its also important to understand that mortgage lenders dont consider all income equally. Some forms of income will count toward qualifying for a mortgage with no problem. But other forms, like overtime, self-employment income and others, will often require at least a two-year history. And some forms of income, like GI Bill housing allowances, wont be counted as effective income toward a mortgage.
Lenders dont count all your debts, either. Things like cell phone bills, car and health insurance, groceries and other expenses arent factored into this calculation.
Calculating your DTI ratio is one step. But the question is: How does that number affect your ability to land a VA home loan?
In these cases, borrowers will get an up-close look at the link between DTI ratio and the VAs guideline for discretionary income, known as residual income.
Answer a few questions below to speak with a specialist about what your military service has earned you.
Dealing with High DTI Ratio
Having too high of a DTI ratio can force borrowers to make tough decisions.
One is to hold off on buying a home until they have a better balance of debts and income. Another option is to seek a lower loan amount.
For example, if your DTI ratio is too high with a $300,000 loan, you might be able to move forward with a $250,000 mortgage. Readjusting your homebuying budget is often disappointing, and it might not be realistic depending on your real estate market, needs, and other factors. But its an option for dealing with a high DTI ratio.
Talk with a Veterans United VA Loan Expert if you have questions about your debts, income, and purchasing power.
About Our Editorial Process
Veterans United is recognized as the leading VA lender in the nation, unmatched in our specialization and expertise in VA loans. Our strict adherence to accuracy and the highest editorial standards guarantees our information is based on thoroughly vetted, unbiased research. Committed to excellence, we offer guidance to our nations Veterans, ensuring their homebuying experience is informed, seamless and secured with integrity.
VA Loans & Debt-to-Income (DTI) Ratio
FAQ
Can I get a VA loan with 55% DTI?
What is the maximum DTI for a VA manual underwrite?
Can you get a mortgage with 40% DTI?
What is the back end DTI for the VA?
What is the DTI ratio for a VA loan?
Front-end DTI Ratio = (Monthly Housing Costs / Gross Income) x 100 Back-end DTI Ratio = (All Other Monthly Costs / Gross Income) x 100 What is the Maximum Allowable Debt-to-Income Ratio for a VA Loan? 41 percent is typically the maximum DTI ratio VA lenders will want to see while accessing your finances.
Can I get a VA loan with a high DTI?
Even if your DTI is above 41%, you may still be eligible for a VA loan, so it’s crucial to discuss your lender’s eligibility criteria to understand whether factors like higher credit scores and incomes will help you qualify even with a high DTI. How Do You Calculate Debt-to-Income Ratio?
What does a ballooning DTI ratio mean for a VA loan?
A high Debt-to-Income (DTI) ratio likely indicates to VA loan lenders that a borrower needs to exercise more financial control. However, not all income is counted equally in the calculation of DTI. Debt totals do not usually include insurance, utility or general household expenditures.
Does the VA provide home loans?
The VA does not provide home loans. Instead, mortgage lenders issue the loans, and they may have their own caps on debt-to-income (DTI) ratio that can vary based on the borrower’s credit and finances. Only certain types of debts and income count toward your DTI ratio.