Your guide to debt-to-income (DTI) ratio for VA loans

If you want to get a mortgage to buy a home, one of the factors that affects your ability to get approved is your debt-to-income ratio. Lenders want to confirm that you’ll be able to keep up with your mortgage payments, and your DTI is a figure that shows how much debt you have relative to your income. The maximum DTI requirement you’ll need to meet will depend on your loan type and lender.

One type of government-backed mortgage is a VA loan. This is a mortgage offered by the U.S. Department of Veterans Affairs to eligible military servicemembers, veterans, and their surviving spouses. If you think a VA loan might be right for you, here’s a rundown of VA loan DTI requirements, how to calculate your DTI, and what to do if your DTI is too high.

What is debt-to-income (DTI)?

Your debt-to-income ratio is a figure that measures how much of your monthly income is taken up by debt payments. You can calculate your DTI by adding up all your monthly debt payments - such as mortgage, credit card, car loan, and student loan payments. Then, divide that sum by your gross monthly income - which is how much you make each month before taxes and deductions are taken out. Convert that result into a percent and you’ll have your current DTI.

DTI is one way that lenders gauge your ability to repay your mortgage. If your DTI is low, it helps show lenders that you can comfortably afford your mortgage. If your DTI is too high, it’s less likely that you will be able to keep up with your mortgage payments. If you have a high DTI, your lender may charge a higher interest rate. Having a DTI that exceeds the maximum set by your lender can impact your ability to get approved for a mortgage at all.

Private lenders offering conventional loans typically have stricter DTI requirements. If your DTI exceeds the threshold for a conventional loan, then you can consider a government-backed loan - like VA loans - that have looser DTI requirements.

Front-end DTI vs. back-end DTI

There are two different types of DTI - front-end DTI and back-end DTI. The difference between the two comes down to which debt payments are included. Front-end DTI includes only your housing costs, while back-end DTI includes all of your debt payments:

• Front-end DTI: Housing costs - including mortgage, homeowners insurance, property taxes, mortgage insurance, homeowners association fees.
• Back-end DTI: Housing costs plus all other debt obligations - including credit cards, car loan, student loan, personal loan, and alimony payments.

Most lenders, especially those offering VA loans, want to see the bigger picture when it comes to your debt and finances. For this reason, they usually use the back-end DTI during the loan approval process.

What is the maximum DTI ratio for a VA loan?

The maximum DTI ratio you can have to get a mortgage depends on the type of loan you’re getting. The Department of Veterans Affairs does not set a strict DTI limit for VA loans but suggests lenders more closely review a buyer’s financial profile if their DTI exceeds 41%. For this reason, it’s advisable to keep your DTI under 41% is you’re looking to get a VA loan.

It’s still possible to get a VA loan if your DTI is higher than 41% if you have strong compensating factors, like high residual income or excellent credit. Some lenders even allow for a DTI that exceeds 50%

How do you calculate DTI for a VA loan?

Now that you understand the importance of your DTI for a VA loan approval, you’ll want to understand how to calculate it. Here’s how.

1. Add up your minimum monthly payments.

First, find the total of your debt payments for the month. You’ll use the minimum payment for each monthly debt. In other words, if your account balance is higher than it usually is, use the amount you typically pay each month. Some examples of debt payments can include:

• Rent or mortgage
• Homeowners insurance
• Property taxes
• Homeowners association fees
• Credit cards
• Car loans
• Student loans
• Personal loans
• Alimony

You don’t need to include expenses like grocery bills or transportation costs. 

2. Divide your monthly debt by your gross monthly income.

Next, determine your gross monthly income, which is the total amount of pretax money you have coming in every month. If you’re the only one applying for the VA loan, only include your monthly income. If you’re applying with someone else, such as a spouse, you can include their income as well. Once you determine your gross monthly income, you can divide your total recurring debt payments by your gross monthly income. 

3. Convert the result to a percentage.

You will receive a decimal as your result, which you can then convert to a percentage. To do that, simply multiply the decimal by 100.

According to VA loan guidelines, the borrower in the example above would qualify for a VA loan since their DTI is less than 41%.

What if your DTI ratio is higher than 41%?

If you have a DTI higher than 41%, it’s still possible to get approved for a VA home loan. However, you may face additional financial scrutiny.

VA residual income

One way to still qualify for a VA loan with a higher DTI is to have extra residual income. This is the amount of money that you have left over after you pay off all of your monthly debts. All VA loans require a minimum amount of residual income, though that minimum varies based on your loan amount, household size, and zip code.

If your DTI exceeds 41%, however, you will need at least 20% more than the usual limit to qualify for a VA loan. So, let’s say that your VA lender requires $1,800 of residual income to qualify with a DTI under 41%. If your DTI is over 41%, you will now need $2,160 of residual income.

Tax-free income

In some cases, your DTI may be greater because you have tax-free income. Tax-free income includes military allowance, workers’ compensation benefits, child support payments, or disability benefits, which are not included in your DTI calculation. As a result, your DTI makes it look like your budget is stretched tighter than it really is. If this applies to you, you can talk to your lender about including your tax-free income in your DTI calculation.

So, your VA lender may include your tax-free income in the calculation if this situation applies to you.

Home loan amount adjustment

Because larger loans require bigger monthly payments, your DTI must coincide with the size of your loan. However, you don’t have to take out the entire loan amount that you were preapproved for. If you instead choose to lower your loan amount, it’s possible you can qualify for a smaller loan with a higher DTI. Check with your lender to determine an acceptable loan and max DTI for a VA loan.

How do you lower your DTI ratio for a VA mortgage loan?

If you have a high DTI, there are steps you can take to lower your ratio. Here are some strategies for getting your DTI in an acceptable range.

Tackle existing debt

Paying off small debts will decrease your DTI. For example, if you pay off your outstanding credit card balance or student loan debt, your DTI will drop. Credit card debt can be notoriously difficult to get out from under, so here are some popular strategies for paying off debt:

• Debt avalanche method: Focus on paying as much as you can toward the highest-interest debts and pay the minimum on your other debts until the high-interest debt is paid off.
• Debt snowball method: Pay off the debt with the smallest balances first and work your way toward the larger debts.
• Consolidation method: If you have balances across multiple credit cards, you can used a debt consolidation loan to combine those debts and pay them off with one monthly payment.

Earn extra income

Earning extra income even temporarily can help you pay down debts and lower your DTI. Some ways to supplement your income include freelancing, developing a side hustle, working a seasonal job, or asking for a raise. Note what guidelines lenders have for proving that income is regular and stable. Active military servicemembers may also need to get approval to get a second job.

Consider a co-signer

Another way to reduce your DTI is by adding a co-signer to your home loan. A co-singer is another party whose name is on the mortgage and is equally responsible for repaying the debt. Another borrower, such as your spouse, on your loan application may help you qualify for a VA mortgage. While adding another borrower to your loan may lower your DTI, it can also increase it depending on the finances of the other borrower. For example, if the other borrower has a significant amount of debt and little income, including a co-signer may not make sense.

Take a few months before applying

You may want to hold off applying for a loan to give yourself time to get your finances in order to put you in a better position to get approved. Even if your DTI meets the maximum threshold for approval, reducing your debts can help you get a lower interest rate. Holding off on applying for a mortgage can give you time to:

• Gather financial documents
• Pay off debts
• Take homeownership courses
• Get a raise or a second job
• Save money for a down payment, closing or maintenance costs
• Watch the housing market

The bottom line: Your DTI can influence your loan terms

Your debt-to-income ratio is a simple way to compare the amount of debt you have to the amount of income you have coming in. If you have a low DTI, it signals to the lender that you can afford to pay your mortgage on time. If you have a high DTI, it indicates you may be a risky borrower.

Find out if your debt-to-income ratio qualifies you for a VA home loan or another mortgage by getting preapproved with Rocket Mortgage^® today.