Understanding Debt-to-Income Ratio

Understanding the Veteran Affairs Debt-to-Income Ratio

If you intend to apply for a VA loan, you’ll no doubt encounter the term “debit-to-income ratio” (DTI) on more than one occasion. This measurement enables lenders to assess the likelihood that you will be able to sufficiently repay your debt. Let’s explore how this concept integrates into your Veteran Affairs loan.

The debt-to-income ratio is a protocol used by financiers which ties a borrower’s monthly payment requirement to their total monthly income. It’s frequently used by VA lenders to ascertain whether a client can meet their Veterans Affairs repayment obligations.

Institutional lenders typically require a DTI ratio of 40 percent or more; however, the methods used for calculating it differ significantly from those applied to conventional and Federal Housing Agency (FHA) lending procedures. Lenders that agree to provide VA-backed loans take just a single ratio into account, which consists of the applicant’s monthly outgoings.

Non-VA loan packages factor in two separate debt-to-income rations — a full tally of monthly expenditure and the total cost of mortgage and house maintenance payments. These two methodologies are sometimes referred to as “front-end” and “back-end” ratios, but the Veterans Affairs loan only takes the back-end option into account.

Common Veterans Affairs lender and loan criteria for the DTI ratio

Essentially, the greater the ratio between debt and income, the more your monthly outgoings exceed your monthly income. This is a significant warning for institutional lending agencies, who are meticulously on the lookout for potential defaults on mortgage payments.

The United States Department of Veterans Affairs employs the aforementioned benchmark value of 41 percent as its usual DTI maximum. However, military veterans exceeding this threshold are still advised make inquiries in case temporary concessions can be made. A high DTI value doesn’t automatically disqualify a potential borrower from the VA program.

Most lenders affiliated with the VA differ in their debt-to-income ratio limitations. Some have been known to even stretch beyond 50 percent, so long as a holistic assessment of the applicant demonstrates positive financial credentials.

How to determine your own Veteran DTI ratio

In order to calculate your personal debt-to-income ratio — which, as mentioned, is the version used for Veterans Affairs analysis — you’ll need to examine your monthly credit reports (outgoings) and divide the total by your current monthly income.

For example, calculate your monthly income by dividing your annual salary by 12. Then, total up your monthly outgoing payments such as credit cards, donations, car loan payments etc. Divide that total by your monthly income to determine your DTI ratio.

Note that the ratio figures should be based on your gross monthly income — i.e. pre-tax obligations.

The DTI is important as the lower the ratio, the healthier your financial standing is likely to be perceived by lending agencies. A higher debt-to-income is liable to discourage lenders, who may believe that your already excessive outgoing payments simply cannot meet the obligation of an additional mortgage loan payment.

A further complication is that institutional lenders often assign different ratings to different income sources. Having a salary backed by a reputable firm, for example, will carry more bargaining power than payments you receive as a self-employed earner. Also bear in mind that certain types of veteran income like GI Bill and similar welfare allowances hold very little influence.

To help make your own DTI calculation, here are the most commonly elements banks use to determine the final ratio:

DEBT

  • Active mortgage payments
  • Monthly automobile payments
  • Student loans
  • Alimony or childcare payments
  • Additional loans
  • Credit card bills

 

Note: The following are exempt from the debt calculation aspect of the ratio:

  • Household and any other insurance payments
  • Household maintenance payments
  • Utility bills

 

INCOME

  • Salary
  • Commission
  • Tips
  • Bonuses
  • Incoming rental payments
  • Incoming child support and/or alimony
  • Investments
  • Dividends

Each of these factors will assist VA mortgage lenders in determining your DTI ratio, so that they can make an informed judgement in whether to invest. However, remember that the debt-to-income ratio is only one element of a series of figures, which include your residual income, credit rating etc., so having a disappointingly high DTI may not exclude you from becoming a homeowner.

You’ll find even more details on the criteria involved in assessing your eligibility for a VA loan on the U.S. Department of Veterans Affairs website, or you can call (800) 720-2515 to seek advice from a specialist.

Adjusting the figures

An additional strategy VA borrowers can employ to mitigate a high DTI ratio is to reduce the value of the loan originally requested.

In fact, your VA loan officer will assist with this aspect of the application. Say your initial request of $300,000 was somewhat excessive in light of your relatively high DTI, the adviser will use sophisticated formulas to recalculate a more manageable figure — $230,000 for example. This has become standard practice among Veterans Affairs lenders across the United States.