VA Loan Debt-To-Income (DTI) Ratio

VA loans can be a lot easier to qualify for than other types of mortgages. You don’t have to make a down payment or pay private mortgage insurance in order to qualify, and the VA doesn’t have a minimum requirement for your credit scores.

However, your income and debt play a big role in getting approved for a VA-backed loan. If your monthly debt payments are high in comparison to your income, which is also known as having a high debt-to-income ratio (DTI), you could have trouble qualifying.

What Is Debt-To-Income (DTI)?

Your debt-to-income ratio (DTI) is the percentage of your income that goes to your debt payments each month. When it comes to qualifying for a VA-backed mortgage, or any other mortgage for that matter, having a high percentage DTI can be a problem.

By contrast, low percentage DTI is a “compensating factor,” for lenders, which means it can help you qualify for a VA loan even if you fall short of other guidelines. Having a low DTI also helps you qualify for a lower interest rate on your loan.

Calculating your VA loan DTA can be difficult since the VA has a long list of rules for how lenders perform this calculation. But you can get a ballpark idea by adding up your minimum debt payments, dividing them by your gross monthly income and then multiplying the result by 100.

Front-End DTI

There are two versions of your DTI. For your front-end DTI, the lender only looks at how much of your income will go to your future mortgage payment (and not your other debts).

The VA does not have a specific requirement for this ratio, but many lenders set a maximum of 28%. When they calculate your front-end ratio, they include all of the following costs with your mortgage expense:

• Principle and interest paid on the loan
• Property taxes
• Homeowners Insurance
• Homeowners association dues (if applicable)

Back-End DTI

For a more complete picture of your financial situation, lenders look at your back-end DTI. This figure compares all of your debt payments, including the expected mortgage payment, to your income.

For VA loans, the maximum back-end DTI allowed is generally 41%. However, there can be exceptions for up to 61%. By comparison, conventional loans may limit you to anywhere from 36% to 43%.

How To Calculate Your Debt-To-Income Ratio

Calculating your VA loan DTI requires a thorough inventory of your income and debt. But even if you take care to get the numbers right, your results might not match the lender’s. That’s because, according to the VA, determining your income is “not an exact science” and the lender has to use “good judgment and flexibility when warranted.”

1. Add up your gross monthly income

First, find the total gross income (that’s before taxes) for yourself and anyone else who will be on the loan contract with you. As you gather the information, keep these details in mind:

• In order for the income to be considered by the VA, it must be both verifiable and likely to continue in the future.
• Some income may not be included if it’s inconsistent or if you’ve received it for less than a year.
• Childcare and significant commuting costs will be deducted from your income calculation.
• For non-taxable income, the lender will use 125% of the amount you receive.

Income Sources and Debt Types Included in VA Loan DTI Calculations

2. Determine your minimum monthly debt payments

Next, find the minimum monthly payment amounts due on each of your outstanding debts. We recommend reviewing your financial account statements and pulling all three of your free credit reports from AnnualCreditReport.com to make sure you don’t miss anything.

As you add up your total debt payments, keep these VA-specific details in mind:

• The VA doesn’t include debts where you have less than 10 payments remaining.
• Collection debt is included, but medical collection debt is not.
• For collection debt where you don’t have a monthly payment arrangement, the lender adds 5% of the total balance to your monthly debt calculation.
• Your lender will review your credit reports and other documents to verify all of your debt is included in the calculation.

3. Estimate your mortgage payment

If you don’t have any loan offers yet, you can use free VA mortgage calculators like the one at Calculators.net to get an idea of what your payment will be. For the best estimate, use a calculator that includes property taxes and insurance.

4. Do the math

Finally, you can follow these steps to find your DTI:

Step 1: Add your estimated mortgage payment to your other monthly debt payments to determine your total debt payments each month.

Step 2: Divide your total debt payments by your total monthly gross income.

Step 3: Multiply that number by 100 to convert it to a percentage.

For example, here’s what your math would look like if your mortgage payment was $1,000, your other debt payments were $500 a month and your gross monthly income was $6,000:

Step 1: $1,000 + $500 = $1,500 monthly debt payments

Step 2: $1,500 monthly debt ÷ $6,000 monthly gross income = 0.25

Step 3: 0.25 x 100 = 25% DTI

What DTI Ratio Do I Need for VA Loans?

The guideline for VA-backed loans is that your back-end DTI should not be above 41%. However, your application won’t be automatically rejected if your DTI is above that number. There are some special circumstances where higher DTI is accepted. For example:

• All of your income is tax-free
• Your remaining income after your debts is high since your other expenses are low.

What if My DTI Ratio Is Higher Than the Limit?

If your DTI is higher than 41%, you can work with the lender to see if you still qualify for a VA loan based on the special circumstances. The lender may also make suggestions for how you can improve your DTI. If improvements are needed, it might take some time to make those changes, meaning you’ll have to wait and reapply again in the future.

How To Lower Your DTI Ratio

There are two main ways you can lower your DTI: by reducing your debt and/or increasing your income. The latter option can be slower since it takes a while to establish a new source of income that will be included in your DTI. But earning more money can also help you pay off debt faster.

In the meantime, you’ll want to look for ways to eliminate debt. “When trying to lower your DTI for a mortgage, a good place to start is by decreasing your credit card debt,” says Jennifer Witkowski, Accredited Financial Counselor and Army Veteran.

Witkowski recommends using the debt avalanche method and says the Powerpay calculator can help you formalize your plan. “Look at your monthly budget and figure out how much extra you can afford to pay every month,” she explains. “Then, add that amount to your payment on your highest-interest card and continue to pay the minimum payment on the other cards.”

Here are some other ways to reduce your DTI:

• Pay raise: Look for ways to increase your current source(s) of income, whether through a raise, promotion or by working overtime.
• Debt payoff: If available, use your savings or a financial gift from your family to pay down your debt. Always consult with your loan officer before making any moves, since you could inadvertently hurt your chances of qualifying. For example, you may need to save some of the money for your cash reserves or your funding fee.
• Find a cosigner: If there’s another qualifying adult who plans to live in the home with you, consider having them apply as a cosigner on the mortgage since their financial information can shift the DTI calculation.
• Federal student loan help: If you have student loans from the federal government, check to see if you qualify for Public Service Loan Forgiveness or for an income-driven repayment plan that lowers your payment or forgives your balance after a set number of payments. Depending on your loan type, you may need to move your debt to a Direct Consolidation Loan
• Mortgage Tax Credit Certificate (MCC): Ask your lender if you can get an MCC, which will reduce your taxes as a homeowner and, as a result, reduce your DTI. The availability of these certificates varies by state.
• Servicemembers Civil Relief Act (SCRA): If you took on a loan or credit card debt before you became a service member, the SCRA allows you to get your interest rates reduced to 6% or less. By reducing your rates, you can also reduce your monthly payment and your DTI. To receive this benefit, you have to notify the creditor. You can find more information at ConsumerFinance.gov.
• Reduce your monthly minimums: See if you can prequalify for a consolidation loan to pay off your debt and reduce your overall monthly payments. Witkowski also suggests calling your creditors to ask if they’ll reduce your monthly minimums.
• Debt Management Plan (DMP): Talk to a certified credit counselor to find out if you qualify for a DMP, which is a payment plan that can reduce your debt payments. While going on a DMP may temporarily hurt your credit scores, it does not harm your ability to qualify for a VA loan.

DTI Ratio & Residual Income

As you can see, your DTI plays a big role in whether or not you qualify for a VA loan. But there’s another related factor that plays an even bigger part: your residual income.

According to the VA, residual income is “the amount of net income remaining (after deduction of debts and obligations and monthly shelter expenses) to cover family living expenses such as food, health care, clothing, and gasoline.” To put it more simply, it’s the amount of money you’ll have for your necessities each month after you buy your home.

Unlike DTI, having low residual income can automatically disqualify you for a VA loan, since it indicates you’ll have trouble covering your basic expenses as a homeowner. How much residual income do you need? It depends on several factors including where you live and your loan amount.

On the other hand, high residual income helps you qualify for a VA loan if you have too little credit history or if your DTI is too high.