Lenders will take several financial factors into consideration when approving home buyers on a loan. While the VA loan program is able to offer more favorable terms to qualified applicants who have served in a military capacity with more lenient requirements, there are still some fundamental qualifying factors that must be upheld under financial scrutiny. If you are not sure how much home you can afford with a VA loan, a VA affordability calculator is a great place to start in determining feasible monthly payments.
What is a VA Affordability Calculator?
A VA affordability calculator acts as a pre-approval tool by estimating how much house you can afford based on your income and expenses. To qualify for a VA loan, your lender will want to assess your debt-to-income ratio (DTI). Your DTI indicates the relationship between income received and what portion of it is eaten by major monthly debts. Typically, a lender will require a DTI of 43% or lower. If your DTI exceeds 43%, it is still possible to qualify for a VA loan. However, you should expect a deeper analysis of your financial records and may be asked to provide evidence of financial cushioning and accountability to mitigate the risk on a loan. This is why a VA affordability calculator is a useful preemptive tool that can help home buyers define the parameters of how much home they can realistically afford.
How Does a VA Affordability Calculator Work?
A VA affordability calculator works by providing home buyers with a formula that combines specific inputs that calculate monthly payments on the individual homebuyer’s financial records and statements. These variables are important because not only do they determine if you can qualify for a loan, they also influence the rates and terms you will repay on a loan. The following is a range of financial variables home buyers are able to input into the calculator to determine a digestible monthly payment:
- Annual Income. Your lender will want to check that there is a steady and reliable source of income coming in to repay the loan amount. In general, this includes sources such as your salary, a spouse’s salary, or pension/retirement. Partial income and bonuses are applicable only if they are considered reliable and can be predicted to continue for the foreseeable future of paying off the loan amount. To verify your annual income, your lender typically requires two years of W2s and current pay stubs.
- Basic Allowance for Housing (BAH). BAH is a military allowance used to offset the cost of housing for VA homeowners who do not receive government-provided housing. Depending on your location, financial situation, and number of dependents claimed, the amount can vary for each homeowner. You can use this monthly allowance to help you qualify for a VA loan and buy a home. Service members stationed in more expensive parts of the country typically have higher BAH rates, allowing them to better compete in more expensive civilian housing markets.
- Monthly Debt Payments. Monthly debt payments are any payments you make to pay back a creditor or lender for money you borrowed. It can include things like student loans, auto payments, alimony, child support, or any other major debt payments.
- Down Payment. This is the portion of the amount a homebuyer puts down on a house. A down payment is not required with a VA loan, but military service affiliates may choose to do so to lower interest payments made over the life of the loan.
- Credit Score. Your lender will check your credit score, which determines your eligibility for loan approval and also influences your interest rate. A score of 680 and above is required for most VA loans, but not necessarily a hardline limiting factor.
- Interest Rate. Depending on the loan term, credit score, and a few other personal financial factors, interest rates on a VA loan currently fall within a range of 1.875 to 2.75%.
- Loan Term. This is the period of time over which the loan gets repaid, typically in increments of 15 or 30 years. It is affected by whether or not you have a fixed-rate term or an adjustable-rate term (ARM). Shorter loan terms mean that the loan gets paid off faster, whereas a longer loan term provides lower monthly payments.
- Military Type. When applying for a VA loan, military service affiliates are required to provide a Certificate of Eligibility (CEO) that demonstrates your entitlement status towards the VA loan program. Eligibility for a VA loan is determined by when you served, the capacity in which you served, and the reason for your separation or discharge.
- Military Disability. Qualifying for a military disability on a VA loan results in some significant deductions from the total loan amount. Those who qualify are not required to pay the VA funding fee. Additionally, VA lenders can count disability income as effective income toward a mortgage
- Previous VA loan Utilization. It is definitely possible to get a second VA loan if you have already used the entitlement program previously. VA home buyers should be aware that the VA funding fee rate is 2.30% for first-time VA loan borrowers with no down payment. The funding fee increases to 3.60% for those borrowing a second VA loan.
- Property Tax Rate. This amount varies by location, but typically falls around 1.2%. To get a more accurate quote, ask your lender to help you determine your property tax amount.
- Homeowners Insurance. Accidents happen, which can be devastating in effect emotionally and financially. Homeowner’s insurance provides security for lenders and homeowners in the event that such an accident occurs. It varies by state and the type of insurance purchased, with lower limits hovering around 1% and upper limits hovering around 6%.
Clearly there are many inputs that get factored into consideration when determining your monthly payments on a VA loan. A VA affordability calculator is certainly a helpful tool in determining an estimate for those costs and also gives you a good idea of what to be aware of when plunging into a financial plan of action.
How Does a VA Affordability Calculator Differ from a Regular Mortgage Calculator?
There are also a few ways in which calculating affordability on a VA loan differs from calculating affordability on conventional loans. For one, as part of more favorable and lenient terms, active-duty and retired military service members, as well as surviving spouses, are not required to pay private mortgage insurance (PMI). PMI is typically required by lenders for borrowers who are not able to put down a downpayment of 20% or more on a house to offset the risk of the home buyer defaulting on a loan. This is because The US Department of Veteran Affairs guarantees that a portion of the loan gets paid through federal-backed funding.
How Can The Home Loan Expert Help?
Hero Loan, The Home Loan Expert’s VA Loan Program. Our veterans, military service members, and their families deserve a trustworthy lending team who will meet them with the same level of passion and dedication they showed in their own service commitments.
Our streamlined underwriting process is able to be done in-house, expediting paperwork and removing some of the stress associated with what can otherwise feel like a bureaucratic process. Our face-to-face approach is a reflection of our personalized touch when it comes to helping our military service members and veterans create a financial plan of action that will get them into the home of their dreams.
An affordability calculator is a great way to start the homebuying process, but an expert lender will be able to provide you with more accurate information on how much home you can afford. Give us a call at 800-991-6494 to speak with one of our friendly lending experts or reach out to us through our application to get started on the road to homeownership today.