VA Home Loan Debt-to-Income Ratio
Escrow, title, principal. Applying for a VA home loan requires learning a whole new vocabulary. One term unfamiliar to many veterans is the debt-to-income ratio. While it’s a mouthful, the concept is easy to understand. Getting this number under control can make loan approval easier and increase the likelihood of obtaining the best terms possible.
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- Debt-to-income ratio, also known as DTI, represents your monthly debt payments divided by your monthly income.
- Though the VA doesn’t set a maximum DTI, most lenders look for one lower than 36%.
- Veterans can reduce their DTI by refinancing debt, paying off existing loans, or increasing their income.
Take your first step towards homeownership with knowledgeable and straightforward advice. Understand what VA home loan debt-to-income ratio is and so much more.
Understanding Debt-to-Income Ratio
When you apply for a VA home loan, lenders want to know that you can repay the borrowed money. One indicator they consider is the amount of any existing debt and how much of your income you allocate to paying it off. The debt-to-income ratio represents the percentage of your monthly income you spend paying off your debt.
To find your DTI ratio, divide your monthly debt payments by your monthly income. Then, move the decimal in the result two points to the right to get the percentage of your monthly income you spend on debt.
The following are the two types of DTI:Â
- Front-end DTI represents your housing costs, including rent or a mortgage, tax payments, and insurance.Â
- Back-end DTI refers to all your debt payments, including credit card payments, student loans, and car payments.
Example of DTI Calculations
Suppose your monthly income is $3,000 and your monthly expenses are:
- $1,000 for a mortgage
- $100 for property taxes
- $200 for an auto loan
- $150 for student loans
To calculate your front-end DTI, add the $1,000 for mortgage and $100 for taxes, then divide by your $3,000 of income. The result equals .366 or 37%. In this example, you spend 37% of your income on housing costs.
To calculate your back-end DTI, add together all of your debts to get $1,450, then divide by your $3,000 of income. The result equals .483, or 48%. In this example, you spend 48% of your income on your debt.
Generally, lenders want to see ratios below 41% for all debt compared to gross income; but can go higher with other strong compensation factors.
Jodi Ulrich
Mortgage - NMLS#9456
VA Guidelines on Debt-to-Income Ratio
The VA doesn’t require a particular DTI ratio, but private lenders do. In fact, DTI is one of the most significant factors in determining whether your home loan will be approved.
Each lender has their own DTI requirements, but many want a front-end DTI ratio of under 28% with a back-end DTI ratio of under 36%. The VA says that a back-end DTI of more than 41% warrants additional scrutiny.Â
Depending on your situation, it’s still possible to get a mortgage with a higher DTI, but your first-choice lender may not approve you, and you may have to pay a higher interest rate or additional fees.
Factors That Can Impact DTI
While your DTI ratio is extremely important, it isn’t necessarily the deciding factor when you apply for a VA home loan. Instead, it’s a number that’s looked at in the context of the size of your loan and your overall financial situation. A lender may be flexible if you’re seeking a $145,000 mortgage to buy a starter home, but they’re likely to be more stringent if you want $400,000 for a luxury property.
Your down payment can also affect how your lender looks at your DTI. While one of the advantages of VA loans is that most don’t require a down payment, providing one can get you access to better loan terms, especially if your DTI is high.
Factors in your personal financial situation, such as your employment status and credit score, also influence how your lender assesses your DTI.
How To Improve Your DTI Ratio
Lowering your DTI ratio is one of the best things you can do to improve your chances of a private lender approving your loan. You can improve your DTI from the debt side by paying down your debt. You can also refinance your debt and even use VA mortgage refinancing if you have a qualifying loan and meet service requirements.
Additionally, increasing your income is another way to improve your DTI. Consider looking for a higher-paying job, adding a part-time gig, or working towards a promotion at your current workplace.
VA Loan and Compensating Factors
When approving or denying your VA home loan, a lender looks at your whole financial situation. While your DTI ratio is an important part of that assessment, it’s not the only factor. Other aspects of your personal financial situation can compensate for a high DTI.
Your DTI is used as a proxy for your ability to pay back a loan, so one factor that can enhance your standing is your credit score. If you show that you’ve responsibly paid off your debts in the past, it may not matter quite as much that you spend a big percentage of your monthly income to do it. Even if your credit score isn’t where you want it to be, you still have VA home loan options.
Employment history is another significant factor. If you show a stable employment history and an upward career trajectory, your lender is more likely to look past your DTI.
VA-approved lenders understand that veterans take many different paths through life. You may leave the service with more debt than you intended, or it may take time to find a suitable civilian career. You may even struggle with a service-related disability that limits your work opportunities.
Good lenders view you as a person, not just a set of numbers. Still, a lender may consider you too risky and deny your loan. If that happens, you can take steps to improve the chances of your next application.
What Happens if Your DTI Is Too High
If your DTI is still too high to get approved for the loan you want, you have options. You can ask a friend or family member with good credit to co-sign your loan. You may also want to consider a reduced loan amount by lowering your budget or making a larger down payment. While the VA has no borrowing limit for those with full entitlement, private lenders will only approve you for a certain amount.
Another option is to pause the loan application process while you work on improving your financial profile. Veterans’ organizations can offer advice on getting ready for a VA loan, and you may want to work with a financial planner.
Make Home Buying a Reality
Your DTI ratio is important for obtaining a VA home loan, but it’s far from the only consideration. When deciding whether to approve your loan and setting your interest rate, the right VA-approved lender will look at your overall financial situation, including your credit score and down payment. Even if your loan application is denied, there are ways to lower your DTI and improve your finances.
If you need guidance on managing your DTI, working with a trusted VA lender can make all the difference. These lenders help countless veterans and their families fulfill their dreams of homeownership by offering resources and advice.
Jodi has over 22 years in home lending, specializes in VA loans, and helping military families achieve homeownership. As a top loan officer at Novus, he’s closed over 9,000 loans across 40 states. Jodi is dedicated to empowering veterans with VA benefits, fostering long-term financial success, and offering personalized service.
