Most loan programs today look closely at your debt ratio. They want to make sure that you aren’t over committing your finances. For example, conventional loans have debt ratios of 28% for your housing ratio and 36% for your total debt ratio. VA loans, though, don’t have such specific ratios. While they have a maximum ratio they would prefer, they don’t put a lot of emphasis on it.
The Total Debt Ratio
If there’s one debt ratio that the VA looks at the most, it’s the total debt ratio. This ratio is the total of all of your debts that include:
- Minimum credit card payments
- Car payments
- Student loan payments
- Personal loan payments
It also includes your potential total housing payment. This includes the principal and interest on the loan as well as your real estate taxes and homeowner’s insurance.
Ideally, this ratio shouldn’t be higher than 41%. If it is, the VA has compensating factors that they allow in order to excuse the higher DTI.
The Best Compensating Factor
If there’s one factor that means the most to the VA, it’s your disposable income that you have each month. This disposable income is the money you have left at the end of each month after you pay your bills. The VA counts this as the money you have for the daily cost of living. This includes covering costs like:
- Utility bills
- Health/car insurance
The VA wants to make sure that you aren’t sacrificing in any areas of your life. They find that borrowers that have to sacrifice (give things up to make their mortgage payments on time) are more likely to default on their loan. That’s why the VA has strict disposable income guidelines. They have requirements for each area of the country, as the cost of living is different in each area, as well as for each family size. The more family members you have, the more disposable income that you need.
If your debt ratio exceeds the 41% VA threshold, you’ll need to compensate by having more disposable income. Typically, you need 20% more disposable income than you would need if you had a 41% or lower DTI. The VA feels that this compensates for the higher DTI and makes you a good risk for a VA loan.
Other Compensating Factors
The VA does allow other compensating factors as well. For example, if you have a large amount of assets on hand, they consider that a compensating factor. The assets can be used should you be unable to make your payment with your regular income. They count your reserves based on the number of mortgage payments you can cover with it.
Other compensating factors include exceptionally high credit scores (in the 700s) or a down payment on the VA loan even though the VA doesn’t require it. If you have any of these compensating factors, the VA lender may be able to overlook your higher DTI.
Watch Out for Lender Overlays
Now all of the requirements we’ve talked about here are the VA’s requirements. The VA doesn’t underwrite or fund the loans, though. They only provide the lender with a guaranty that they will repay them a portion of the loan should you default.
The lenders that fund the loans are able to make additional requirements on top of what the VA requires. In other words, if they think a 41% debt ratio is too high, they may require a lower one. They may also require a specific credit score or a certain amount of assets on hand to get approved.
If you find that you can’t get approved by a lender because their requirements are tougher than the VA requires, you can shop around. There are thousands of VA lenders available today and each one has their own requirements. Some may be less strict than others. Keep shopping until you find the loan that’s right for you.Click to See the Latest Mortgage Rates»