One of the reasons the VA home loan has historically had the lowest delinquency rates of any other mortgage is the VA loan has adhered to tried and true lending guidelines that have lasted throughout the years. One of these underwriting stalwarts is the VA debt-to-income ratio, or simply “debt ratio.”
The debt ratio is a percentage of overall monthly debt divided by gross household family income. For example if the gross monthly income is $8,000 and housing payments plus a student loan payment and an auto loan payment add up to $3,000 then the debt ratio is $3,000 divided by $8,000 = 37.5.
The VA has a maximum debt ratio guidelines it has employed over the years and it is set at 41 percent. For purposes of qualifying, the housing payment consists of the principal and interest payment, one month’s worth of property taxes and insurance plus any condominium or homeowner’s fees. Let’s look at an example of a housing payment breakdown:
|Principal and Interest||$ 1909|
|Property Taxes||$ 333|
|Total Housing Pymt|
Additional debt which must be included in the VA debt ratio are monthly obligations such as credit card payments, installment loans and leases and other debt. Other debt such as child support or alimony payments count as does children’s day care. Utility payments, cell phone, food and other daily essentials do not count in these calculations. Let’s look at some common monthly payments:
|Student Loan||$ 150|
|Total Other Pymts|
|Total All Pymts|
If we divide $3,667 by $8,000 monthly income the answer is .46, or a 46 debt ratio. 41 percent of $8,000 is $3,280. This means that there is too much debt by $387 according to VA standards. There are allowances that VA Lenders can make to have the debt ratio be higher than 41 but there are other considerations to be made concerning residual income, employment and credit histories.
Yet if the gross monthly income was $9,000 then the debt ratio would be right at 41, the maximum qualifying debt ratio that lenders will typically allow. Ratios can be adjusted by reducing monthly debt, lowering the housing payment or borrowing less money.
Grant Moon is an Army Reserve Captain and CEO of VA Loan Captain, Inc., a veteran-owned business that facilitates VA Home Loan Purchase and Refinances through a platform of lenders that offer competitive rates for veterans and servicemembers. VA Loan Captain's Pay It Forward Program also provides $200 to a partner veteran non-profit of the customer’s choice for every loan closed. For more information, visit www.valoancaptain.com. If you have home loan questions, you can send them to Capt. Moon at email@example.com.