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

by Kevin Craig

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.