Considering buying a home is a major financial step, and qualifying for a home loan is the first major component of making that happen. There are various factors considered by lenders in determining your ability to manage a monthly mortgage payment, such as credit scores and past repayment history etc. One particularly important factor used by lenders to evaluate the risk of potential borrowers defaulting on their mortgages is their debt-to-income ratios. While loans guaranteed by the U.S. Department of Veterans Affairs tends to offer qualifying current and former military service members some key advantages over traditional mortgage lenders, it’s still important to understand how the DTI can impact your ability to get a home loan.
Understanding the Debt-to-Income Ratio
The debt-to-income (DTI) ratio is the percentage of your gross monthly income used toward your monthly debt payments. The ratio is used by lenders to determine the risk they may incur by adding you as a borrower. The debt-to-income (DTI) ratio is meant to measure the amount of income a person has to cover their mortgage obligation.
Borrowers with low debt-to-income ratios are more likely to be able to manage their monthly mortgage payments well, while those with high debt-to-income ratios may struggle to fulfill their monthly debt obligations and therefore pose a higher risk to lenders. Banks and financial services providers have a preference for potential borrowers with low DTI ratios. Otherwise, there is a chance that potential borrowers might find themselves overextended by making too many monthly debt payments each month, which could lead to falling behind on their home loans and into foreclosure.
As a home buyer, it is important to understand what your debt-to-income (DTI) ratio is, not only because it reveals your ability to cover your monthly debt obligations. It will be a determining factor in getting a lender to approve your mortgage application. The more debt you have, the more they will consider lending you money a risky proposition. Knowing this in advance can allow you to see where you can make adjustments to reduce your current debt obligations or show additional income, in effect reducing your debt-to-income (DTI) ratio.
Calculating Debt-to-Income Ratio for a VA Home Loan?
The debt-to-income ratio is basically your payments towards major debts per month divided by your monthly verifiable income, and then converted to a percentage. The acceptable debt-to-income ratio for VA loans is 41 percent. Let’s look at how to figure out your DTI using real numbers:
Imagine that your annual Income is $50,000. If you divide that by 12 for months in the year, you get your monthly income — $4,167. Now, you would take that amount and multiply it by 0.41, the acceptable debt-to-income ratio for a VA loan. The result is $1,709.
Your monthly debt obligation may not be more than approximately $1,709 in order to qualify for the VA loan.
Working with Your Debt-to-Income Ratio
If your debt-to-income ratio is above 41 percent, it’s time to do some work to lower it before applying for a VA loan. You have several options. For one, if you can pay down some debts quickly, it may be in your best interest to do so. Aim for debts like credit cards and personal loans with higher interest rates first. If you’ve saved a good amount of money for a down payment, you may be able to put down a smaller down payment and use some of that money to pay off enough debts to lower your DTI to a qualifying range. If you can’t lower your debt, consider how you might be able to increase your income.
Another way around a VA loan debt-to-income ratio over 41 percent might be getting a co-signer on your loan application. Having someone with a lower debt-to-income ratio may be just the thing to help you qualify. However, co-signing on a home loan is a big responsibility, so carefully consider if and who you might ask for this monumental favor. Alternatively, you might consider whether holding off on buying makes better financial sense for your situation.
How Can The Home Loan Expert Help?
Hero Loan, The Home Loan Expert’s VA Loan Program. Even if your DTI seems high, the VA requires lenders to consider all other credit factors, such as FICO scores, debt payment history, etc., to make an analysis of eligibility. The loan officers at Hero Loan have a deep understanding of VA loan regulations, and a desire to help those who have served their country. So contact us today to get their expertise working for you to determine whether a VA loan is right for you.
Chris
