If you are eligible for a VA loan, you have a great loan program at your disposal. Not only do you get 100% financing, but you also get access to flexible underwriting guidelines.
Unlike other loans in the industry, the VA loan has relaxed guidelines for just about every aspect of the loan including the debt-to-income ratio. In fact, the VA doesn’t have set DTIs that you must have in order to qualify.
So what DTI should you have in order to get your VA loan approval?
The Lower the DTI the Better
In any loan program, the lower your debt-to-income ratio, the lower the risk you pose to the lender. This means that you’ll be better able to afford your loan without the risk of default. The VA has a ‘generic rule’ that you can’t have a DTI higher than 43% for your total debt ratio.
Your total debt ratio is the housing payment plus any other existing debts you have compared to your gross monthly income. In other words, you shouldn’t spend more than 43% of your monthly income on your monthly obligations. This leaves you enough money to focus on the daily cost of living.
Each Lender Has Their Rules
Now just because the VA doesn’t have a housing ratio (front-end ratio) maximum and they allow a 43% total debt ratio, doesn’t mean that every lender will allow that. The VA doesn’t fund the loans and they don’t even underwrite them. Instead, they guarantee the loan for VA lenders.
VA approved lenders are select lenders the VA allows to write loans in their name. The lender must follow the VA’s minimum requirements in order to write a loan. But they can also add their own requirements on top of it. Even though the VA guarantees the loan for the lender, the lender is still at risk.
Some lenders will increase the debt ratio that they require or they will set a maximum housing ratio to ensure that you don’t get in over your head. What you can assume, though, from any lender is that they won’t require DTIs as strict as conventional loans require. If you want conventional financing, you’ll need a 28% maximum housing ratio and a 36% maximum total debt ratio. Most VA lenders are a bit more lenient than that.
What the VA Does Require
Just because the VA doesn’t look at the debt-to-income ratio doesn’t mean that they aren’t looking closely at your spending. Instead, they focus on your disposable income. The VA has a set amount of disposable income you must have each month in order to qualify.
Just how much disposable income you need depends on your location and your family size. The higher the cost of living is in your area, the more disposable income you need. The same goes for your family size – the larger your family the more money you need to cover the daily cost of living.
The VA believes that focusing on the disposable income figure helps keep the risk of default lower than if they focused on the DTI.
So what is the ideal DTI for a VA loan? It’s whatever your chosen lender requires. If you want a goal to reach towards, aim for the FHA’s requirements of a 31% housing ratio and 41% total debt ratio. This should leave you ample room to get the VA approval that you need to buy your home.Click to See the Latest Mortgage Rates»