Determining how much you can borrow may be more complex than you realize. Factors including DTI, residual income, and the property’s appraised value all play into this.
Once service members start thinking about a home purchase, a common question arises: How much can I borrow with a VA Loan?
It’s a simple question. The answer? A bit more complex. Here’s a look at five factors that will determine how much VA loan you can get:
The VA loan program doesn't employ a loan maximum. But there's a limit above which buyers need to make a down payment, which otherwise isn't necessary for the typical VA purchase. That limit in most parts of the country is currently $453,100. Why? Because of an important feature known as the “VA guaranty.”
The VA guaranty is the amount of each VA loan that is backed by the federal government. If the borrower defaults on the loan, that guaranteed amount is paid back to the VA lender by the Department of Veterans Affairs.
Lenders are usually promised 25 percent backing on each VA loan. But that backing typically maxes out once a loan hits $453,100.
Lenders are free to issue VA loans above that amount, but they won’t be granted additional backing. Since that puts more of a lender’s funds at risk, buyers will need to make a down payment when pursuing loans above the county loan limit.
The $453,100 VA loan ceiling applies to most counties in the U.S., however there are over 200 high-cost counties where the max VA loan amount rises to $679,650 in the continental U.S.
The higher limits allow service members in the VA’s high-cost counties access to a more expensive market. But those larger loans must be supported by a substantial income, which brings us to Factor #3:
Current income and debts can drastically impact the amount service members can borrow. A yardstick known as the debt-to-income (DTI) ratio helps lenders decide how much additional debt a veteran can handle.
Lenders start calculating the DTI ratio by tabulating monthly debts. Only “significant” items (such as the prospective mortgage payment, car loan payment, student loan payment and child support) will figure into that equation. The monthly debt total is then divided by total monthly income to result in a final DTI ratio.
DTI guidelines can vary by lender. Generally, the lower the better, but you could have a high DTI and still be able to obtain a VA loan.
|Total monthly debt||$1,400|
|Total monthly income||$3,500|
|Debt-to-income ratio ($1,400 divided by $3,500||40%|
Residual income also affects the amount a service member can borrow with a VA loan. Monthly residual income is the net income available (after deduction of a mortgage payment and other significant monthly debts) to cover typical living expenses such as food, health care, clothing and gasoline.
The VA employs specific residual income requirements based on region and family size. A Massachusetts family of five, for example, needs to have at least $1,062 left over each month after mortgage and other debt payments in order to meet VA guidelines.
Family size over 5: Add $80 for each additional member up to a family of seven.
Service members who fall short of residual income standards can often shift to a smaller loan amount for a good shot at VA loan approval.
VA loans can’t be issued for more than a home’s appraisal value. Should the appraisal value fall short of the purchase price, buyers have a few options to consider:
With so many factors pouring into the equation, there’s only one effective method for estimating a service member’s buying potential: preapproval.
Through preapproval, a VA lender will assess each of the factors mentioned above (with the exception of the appraisal value). This detailed evaluation helps service members determine a workable price range, and can be extremely helpful on the house hunt.
Veterans and active-duty service members can start the preapproval process by calling a Veterans United VA loan specialist at 855-870-8845 or by filling out this quick form.
If you'd like additional information on the VA mortgage process check out this helpful guide.