Smart Military Money
Personal finance tips andadvice for the military lifestyle.
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Calculating and understanding your debt-to-income ratio doesn’t have to be a struggle.
If you’ve done research into applying for a VA home loan or car loan, you may be familiar with lenders calculating your debt to income ratio. It’s important to know how to get a general idea of what your debt-to-income ratio is, how it is calculated and why it may affect your future financial decisions.
Debt-to-income ratios are exactly what they sound like — a comparison of your monthly debt to your monthly income.
This is one of the most common questions about DTI ratios. Sometimes things we wouldn’t include in our monthly debts may show up in our DTI ratio and other things we expect are left out.
Knowing about your DTI ratio is important when you want to apply for a loan.
Your DTI ratio, like your credit score, is another way for lenders to determine your ability to pay back a loan. When your DTI ratio is high, your expenses are verging on overtaking your income and this means you’ll be less likely to pay back a loan.
Generally, the more you’re asking for, the lower your DTI will need to be. The VA benchmark is a 41 percent DTI ratio, which is higher than most other loan programs. Prospective homebuyers with a ratio above that threshold have to meet additional financial requirements.
Cutting recurring debt or suddenly making more money are difficult propositions. But there’s another way to lower your DTI ratio when you’re looking to purchase a home: Shoot for a lower purchase price. Seeking a smaller loan amount will mean a smaller monthly mortgage payment, which in turn will lower your DTI ratio.
That can be a tough pill to swallow for some military buyers, but it can sometimes prove the simplest path to getting into a home.
Photos courtesy of Philip Taylor PT & Photosteve101
2 Comments
Is it correct that Student loans are only held against a person as debt IF they are out of school?
I once read that as long as you are a current student all education loans are not taken into consideration when calculating DTI ratio.
If you’re not paying the loan, then it is not part of your debt yet.
In general, if the deferment lasts longer than 12 months from closing, it is not a part of your debt. That’s the VA’s approach. But lenders may have additional requirements.
-Christian L.