Millions of people have served in the US military. And as a way of thanking them for their service, the government introduced the VA loan guarantee program, which was officially introduced through the Servicemen’s Readjustment Act on June 22, 1994. This program helps eligible veterans qualify for home loans and also provides them numerous other benefits. However, in order for the veterans to qualify and benefit from VA home loans certain service and entitlement requirements have to be met – one of which is an acceptable VA debt-to-income ratio. To understand about these requirements, continue reading.
How Does A Veteran Qualify?
Over the past few years, the popularity of VA loans has increased greatly because of the various benefits they have to offer. But, as mentioned earlier, certain eligibility requirements have to be met and not all people qualify for VA loans. You can qualify for VA loans if you:
- Have served more than 6 years in the Reserves or National Guard services
- Have served for 90 successive days during wartime
- Have served 181 successive days during peacetime
- Are the surviving spouse of a service member who died during active-duty
- Have a VA Debt-to-income (DTI) ratio below 41%.
If you meet any of the above criteria, you are eligible for a VA loan. However, today we will be discussing one of the most often overlooked eligibility criterion which leads to the rejection of many loan applications, that is: The VA Debt-to-Income Ratio. Continue reading to learn more about the significance of debt-to-income ratio in VA Loans.
What Is The Acceptable VA Debt-To-Income Ratio?
The VA debt-to-income ratio comes in the last stages when obtaining a VA Loan Certificate of Eligibility (COE) and is perhaps one of the most important factors when it comes to applying for a VA loan. For veterans, reservists and National Guard members, the acceptable DTI ratio is 41%. But, what is your debt-to-income ratio? Well, as the name implies, the DTI ratio refers to the percentage of your overall monthly income which goes towards debts, such as loans, credit card debts, etc.
So, how can you calculate your VA debt-to income ratio? Well, nowadays there are many websites where you can calculate your DTI ratio or you can even use a free VA loan calculator, as they are useful in calculating the DTI ratio and overall purchase cost.
How to Calculate Your DTI Ratio?
Usually, you would have to calculate the overall money spent on house maintenance, educational loans, credit card bills, car loans, insurance premiums and taxes to determine your DTI ratio. Still don’t get it? Then, let’s take a look at an example on how to calculate your VA debt-to-income ratio on your own before applying for a loan:
Let’s assume you have an annual income of $48,000. Now, divide your annual income by 12, so that you get your monthly income ($48,000/12 = $4,000). Now that you have determined your monthly income, you will have to multiply it by 0.41 to determine your debt-to-income ratio ($4,000 x 0.41 = $1640). Please note that if your debt is more than $1640, you will not qualify for a VA home loan.
What If Your DTI Ratio Is More Than The Acceptable Limit?
After receiving your VA loan application, the mortgage underwriters will conduct a thorough inspection of your VA debt-to-income ratio if it is more than 41%. Please note the application need not be rejected straightway, as you can still qualify for a VA loan under the circumstances where your DTI ratio is perhaps more than the eligibility limit due to tax-free income or where your monthly income crosses the acceptable VA debt-to-income ratio limit by approximately 20% or more.
If your VA loan application does get approved by the mortgage underwriter even after your debt-to-income ratio crosses the 41% benchmark, the underwriter will have to justify his/her actions. Now, why is that? Well, according to the lender’s handbook and laws of VA home loans, the mortgage underwriter has to explain the reasons behind approving loan applications in certain cases.
How Can You Lower Your Debt-to-income Ratio?
In order to reduce your VA debt-to-income ratio, you will have to work on your credit and cut down your overall debt load and the best way to do so is to pay off your debts as soon as possible. But how can you do that? Well, it isn’t exactly simple, but you can consider trying various debt repayment methods, such as the debt avalanche, or debt snowball, or of course you can get assistance from your bank. In addition, you can even take help from various debt relief programs.
However, if you are still not able to pay off your debts, then a co-signer might be a possible solution which can help you get a VA loan. Once you get a co-signer, all you have to do is wait for a few months for your application to be processed.
So, now that you know the role VA debt-to-income ratio plays in VA loans, make sure to organize your finances beforehand when thinking about applying for a loan.