VA loans have some of the most relaxed guidelines out of any program in the industry today. They don’t focus on credit scores or debt ratios, but can you have too much debt and not get approved?
While the VA doesn’t ‘focus’ on debt ratios, they do like to see veteran’s debt ratios no higher than 41% of their gross monthly income. This is the total debt ratio, which includes all housing, credit cards, installment loans, and student loan payments. The VA wants to know that you have enough money left over each month to cover the daily cost of living – this is their focus.
Understanding the VA Debt Ratio Requirements
As we stated above, the VA requires a max 41% debt ratio, but they often allow ratios as high as 43%. There’s a catch, though. If you have a DTI that is 41% or lower, you only need to meet the minimum disposable income requirements for your area and family size
If you have a DTI that is higher than 41% of your gross monthly income, you may still get approved, but you must meet higher disposable income requirements. Typically, the VA requires that you have 20% more disposable income than is required for your area/family size in order to account for the higher debt ratio.
What is Your Debt Ratio?
Do you know your debt ratio? You may want to figure it out if you want to see if you qualify for VA financing. While you may not come up with the exact number that the VA does, you’ll have a general idea of how much money you spend versus what you make.
Your debt ratio takes into account the following types of payments:
- Housing (principal, interest, taxes, and homeowner’s insurance)
- Car payments
- Student loan payments
- Minimum credit card payments
- Personal loan payments
They don’t take into account things like utility bills, groceries, or tuition payments. This gets figured into your ‘daily cost of living’ and is accounted for with your disposable income. That’s why the VA puts such emphasis on your disposable income. They want to know that you can afford your housing payment, your other monthly obligations, and the daily cost of living without a doubt. This helps to limit your risk of default.
You can figure your debt ratio by determining the total of all of the payments discussed above, including the potential housing payment if you get the VA loan. You then divide that total by your gross monthly income. This is your income before your employer takes out taxes. The result is your debt ratio and it should be less than 41% if you can help it.
The Overall VA Approval
Like we stated above, the VA doesn’t put a lot of emphasis on the debt ratio, but they do look at it. They want to know that you can afford the housing payment. They also look at the big picture, though. They want to know your risk of default looking at everything, which includes your credit score, DTI, disposable income, and your assets.
For example, if you have an exceptionally high credit score, but your debt ratio is close to the 41% maximum, you may still be able to qualify. The higher credit score lets lenders know that you are financially responsible. They may not worry as much if you have a higher DTI because you are likely to make your payments on time.
The same is true if you have a large amount of assets on hand. Lenders call these reserves. They determine the amount of your reserves based on the number of months of mortgage payments it will cover. For example, if you have $5,000 and your mortgage payment is $1,000, you have 5 months of reserves. This can help offset other negative aspects of your loan application.
The VA does have a maximum debt ratio that you should follow, but it’s not the only factor. While you should minimize your debts as much as possible, put more focus on your disposable income to make sure that you qualify for the VA loan that you need.