VA Loan Eligibility & the Debt to Income Ratio
Guide to VA Loan Eligibility
Potential military homeowners can qualify for a VA home loan, provided their debt-to-income ratio meets VA and lender standards. Although the debt-to-income ratio, or DTI ratio, is an important part of your financial history that VA loan lenders examine, it’s only one of several VA loan qualifications.
What does debt-to-income ratio mean?
Simply put, a borrower’s DTI ratio measures the borrower’s monthly debt against his or her gross monthly income. It’s expected and common to have some debt. Only one DTI ratio matters to VA loan lenders and it includes monthly debts such as housing costs, recurring debts and other outstanding payments.
Conventional, FHA and USDA home loan lenders make two DTI ratios for borrowers: one solely for housing expenses (front-end ratio) and one all-inclusive total of major monthly debts (back-end ratio). The VA ignores the front-end ratio and looks only at borrowers’ back-end DTI ratios.
What’s a good DTI ratio?
The VA’s benchmark is 41 percent, but VA loan lenders are not beholden to that standard. Therefore, military borrowers will likely find different DTI ratio standards with different lenders. DTI ratios are a decent measure of financial health, so lenders aren’t keen on doling out loans to borrowers with overwhelming debts.
With that said, do not be discouraged if your DTI is not below that 41 percent threshold. That will not automatically disqualify you for a VA loan, although it will require you to have additional residual income, which is another VA requirement. Other parts of your financial history influence lenders’ ultimate decision. That’s why it’s important to also monitor and maintain a healthy credit score.
How do you calculate back-end DTI ratios?
To get the quotient that is your back-end DTI ratio, simply divide your significant monthly debts by your gross, meaning pre-taxed, monthly income. Take a look at this example:
- You earn a $54,000 salary, so divide that by 12 to find your gross monthly income: $4,500.
- Debts include your $250 payment for an auto loan, $850 on your new mortgage and $300 on other debts (e.g. credit cards, lines of credit). Your total debts for the month equal $1,400.
- Divide the $1,400 in debts by your $4,500 gross monthly income for a back-end DTI ratio of 31 percent.
The DTI offers a glimpse at a borrower’s potential ability to take on a VA loan. A ballooning DTI ratio likely indicates to VA loan lenders that a borrower needs to exercise more financial control. However, not all income is counted equally.
What incomes and debts to VA loan lenders use for DTI ratios?
Here’s a non-exhaustive breakdown of incomes and debts:
Examples of incomes (pre-taxed)
- Earned income, tips, commissions, overtime, bonuses
- Rental property income
- Residual income from investments
- Child support and/or alimony
Examples of debts
- Mortgage payments (current and new)
- Auto payments
- Credit card minimum payments
- Student loan payments
- Co-signed credits
- Child support and/or alimony
Debt totals do not usually include insurance, utility or general household expenditures. But also notice that not all forms of income are considered either. GI Bill income for housing is not counted, and some forms of income—such as commissions and self-employment earnings—may require proof of two years of history.
So if my DTI ratio is high, can I still get a VA loan?
It’s possible, yes, because VA lenders look at your DTI ratio, your credit history and score, your income history and more. It’s not as if lenders will look only at your DTI ratio. They’ll look at your finances on a macro scale.
Lowering your desired VA loan amount is one more thing to consider borrowers with high DTI ratios. Loan officers suggest borrowers reduce the VA loan they seek, and it can adjust the DTI ratio to a realistic, reasonable level.
Take control of your DTI ratio through debt management and smart spending, all the while knowing it’s not the only factor VA loan lenders consider.