VA Loans Insider
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When applying for a VA home loan, borrowers hear a lot about something called debt-to-income ratio.
It’s an important tool that plays a key role in determining what kind of VA loan, if any, you can secure.
In essence, debt-to-income ratio, or DTI ratio, compares a borrower’s total monthly debt payments to his or her gross monthly income. The world of VA lending looks at DTI a bit differently than the other major lending avenues (FHA, USDA, conventional), in that the agency only cares about one ratio, which factors in all of the borrower’s monthly debt, from housing costs and revolving debts to anything else that’s pertinent.
The other major loan options tend to favor two separate DTI ratios, one solely for housing expenses and a second, holistic tally. You might hear them called front-end and back-end ratios. The VA considers only the back-end ratio.
In general, the higher the ratio, the more likely that your monthly expenses will outstrip your monthly income. That’s a red flag for lenders who are constantly on the lookout for warning signs and potential indicators of mortgage default.
The VA uses a DTI benchmark of 41 percent, which is higher than what you’ll find with conventional and even FHA financing.
But prospective borrowers with a debt-to-income ratio above that threshold shouldn’t immediately resign themselves to renting. A DTI ratio greater than 41 percent triggers additional layers of fiscal scrutiny, but it doesn’t automatically disqualify you from obtaining a loan.
Veterans with a DTI ratio above that threshold have to meet a higher residual income requirement. That’s a separate standard we cover elsewhere (See: Explaining the VA’s Residual Income Standard).
There’s also another approach prospective borrowers can take if their DTI ratio is a bit too high: Try a lower loan amount.
That’s exactly what the loan officer will do. If a $250,000 loan looks to be a bit too much for the veteran, the lender can essentially just play with the numbers until they become workable. Instead of $250,000, maybe try $225,000 or $215,000. This kind of plug-and-play with loan amounts is standard fare for lenders nationwide.
Sure, it’s disappointing when veterans discover the $250,000 house they’ve been eyeing for months isn’t really in their price range. But a $215,000 house is better than none at all. And, of course, the other option is for prospective borrowers to tackle their credit and financial issues first and hold off on purchasing a home.
Photo thanks to Tim via Flickr Creative Commons
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9 Comments
I think that it is also worth mentioning that your big 3 credit report has to be above a 620 average for most lenders, who are willing to work with arranging financing in your local.
Lynn, you’re absolutely right. We’ve referenced the 620 benchmark across the VA Loans Insider channel, but it certainly bears repeating.
Its 640 minimum actually.
Ok, I’m a bit confused. My husband has tried applying for a VA loan of $40,000.00 and he got denied. Yes, his credit score is a bit low right now but when he spoke to the lender, they said that alls he needed to do was get his student loan back on track which he did. They are still denying him and they won’t tell him why. Can anyone help with this confusion? Thank you.
@facebook-100002520365646:disqus : It’s tough to say without knowing more about his current credit and financial situation. What did he have to do in order to “get his student loan back on track?” And do you have a sense of his current credit score?
can you get a va loan when you own an other home?
You can providing you are ready to call the new home you purchase your primary residence.
Own a home with fha loan, have renters in place, would like to purchase another home using my Va loan but was told by lender its a no go bcause my current home has to have 30% equity, need help.
ok i was told that i could buy a four flat that i could rent out and one apartment would be mind to live in so that would be my income im waiting to get my ssid payments to come but waiting for the judge to make his order on it so if i could get it now it would help me out im a homeless vet trying to get it going i have a building pick out in wilmington il so can you do this without money down please help me
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