Your Guide To Debt-To-Income (DTI) Ratio For VA Loans

When applying for a home loan, your debt-to-income ratio (DTI) is a deciding factor for approval. A VA loan – a government home loan backed by the Department of Veterans Affairs for active-duty members, veterans, or surviving spouses, is no different.

Knowing your DTI ahead of time is helpful. This ratio tells the lender if you can handle the additional debt with your current debt compared to your income. If your DTI is high, lenders could see you as a risk and deny your loan. Here is a deep dive into debt-to-income ratio VA loan requirements and how to improve yours if it doesn’t meet the benchmark.  

A debt-to-income ratio or DTI provides an assessment of the amount of debt you owe on a monthly basis versus your gross monthly income. In other words, it’s the percentage of your monthly income (before taxes) that is carved out to pay for outstanding debt such as your car payment, rent, credit cards and mortgage.

When applying for a conventional mortgage or a non-conforming loan such as a VA loan, lenders use your DTI to determine if you can handle the additional amount of debt you’re about to take on. Typically, borrowers with lower DTIs are viewed more favorably because it indicates the borrower is less risky than a borrower with a high amount of debt who might be hard pressed to make monthly payments if they get in a financial bind.

To calculate your DTI, you simply add up all of your minimum monthly payments (auto, mortgage, credits cards, etc.) and divide by your gross monthly income.

Front-End DTI Vs. Back-End DTI

During the mortgage underwriting process, lenders take a look at your front-end DTI and your back-end DTI. With a front-end DTI, lenders only look at your recurring housing costs, including your mortgage payments, homeowners’ insurance, property taxes, and your HOA (homeowners association fee) if you have one in your neighborhood.

Whereas with a back-end DTI, all of your required monthly minimum payments are included in the calculations. These include monthly expenses such as student loans, credit cards, or personal loans. Essentially, lenders include all of your outstanding debt in this equation.

Most lenders, including VA lenders, want to see the bigger picture. For this reason, they usually use the back-end DTI during the loan approval process.

The maximum DTI varies depending on the type of mortgage you are applying for. But the ideal DTI ratio for a VA loan is 41%. It’s important to note that the Department of Veterans Affairs doesn’t actually set a maximum limit on DTI ratio, but rather provides guidelines for VA mortgage lenders who set their own limits based on the borrower’s credit score and other financial factors.

Therefore, this means It’s possible to receive a VA loan approval even if your DTI is above 41%. So, make sure to ask your lender what their DTI criteria is so you know if you have a chance for loan eligibility.

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.

• 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
    • Homeowners association fees
    • Car loans
    • Student loans
    • Personal loans
    • Alimony

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

• Divide your monthly debt by your gross monthly income
  • Next, determine your gross monthly income, which is the total amount of pre-tax 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. 
• Convert the quotient 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%.

If you have a DTI higher than 41%, you still have options to qualify for a VA home loan. However, you may face additional financial scrutiny.

VA Residual Income

The first option to qualify with a higher DTI is to have extra residual income. All VA loans require a certain amount of residual income, which is the money that’s left over after you pay off all of your monthly recurring debts. However, the precise amount depends on factors like mortgage amount, household size and your 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 due to the presence of 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.

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

Home Budget Adjustment

Because larger loans require bigger monthly payments, your DTI must coincide with the size of your loan. So, if you choose to lower your loan amount, it’s possible you can qualify for a smaller loan with a higher DTI. Check with your lenders to determine an acceptable loan and max DTI for a VA loan.

If you have a high DTI, don’t fret, there are ways you can lower your ratio. Here are some strategies for getting your DTI in an acceptable range.

• Eliminate monthly payments: 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.
• Increase your income: Some ideas for boosting 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. Depending on your situation, you may also need authorization from your chain of command to obtain a second job.
• Add another borrower to the loan: Another borrower, such as your spouse, on your loan application may help you qualify for a VA mortgage loan. 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.
• Wait a few months before applying: If these take you some time, you may want to hold off applying for a loan. This will give you time to get all of your financial documents in order, pay off debt, and increase your income.

Your debt-to-income ratio, or DTI, is a simple way to compare the amount of debt you have versus the amount of income you have coming in. Applicants with a low DTI is one thing VA lenders look for when applying for a VA loan to ensure you aren’t a risky borrower.

If by chance, you have a higher DTI, there are some other options to qualify for a VA loan and ways to lower your DTI prior to taking out a mortgage. Find out if your debt-to-income ratio qualifies you for a VA home loan or another mortgage by getting approved with Rocket Mortgage^Ⓡ today.