DTI Requirements (and Exceptions) for VA Loans
Applying for a VA loan requires a lender to look at your debt-to-income (DTI) ratio. DTI ratio is your total monthly debt payments divided by your gross monthly income. The VA prefers eligible borrowers to have a DTI ratio of 41% or less to be considered for VA loan approval. However, lenders have some flexibility if a borrower can show strengths in other areas.
What is DTI?
As mentioned, the DTI ratio compares your monthly debt to gross income. So, to arrive at your figure, your lender will need to verify all of your anticipated obligations (including those related to the new mortgage), as well as what you earn in a given month. Debts are usually rent or mortgage, credit cards, which are considered revolving debt, car payments, and other loans.
How to Calculate Your DTI Ratio
To calculate the DTI ratio, lenders use this simple formula:
Total Monthly Bills ÷ Total Monthly Gross Income = DTI Ratio
For instance, a Veteran pays $400 a month for an auto loan, $600 a month for other monthly debt payments, and $2,000 toward their new monthly mortgage. The Veteran’s total monthly debt is $3,000.
This Veteran’s income is $7,000 a month before taxes and deductions (gross).
Therefore, $3,000 (debt payment) ÷ $7,000 (total monthly gross income) = .428 x 100 = 42.8%.
What Is Considered Debt?
It’s important to understand which of your obligations will be used to calculate your DTI ratio. Here is a list of some of the more common debts that are considered:
- Housing expenses
- Anticipated or existing mortgage principal and interest
- Property taxes
- Homeowners and other insurance costs
- Homeowner Association (HOA) dues
- Debts and obligations
- Car payment(s)
- Revolving debt (credit cards)
- Installment loans
- Childcare expenses
Tax-free income like certain military allowances, child support payments, workers’ compensation benefits, disability retirement payments, and certain types of public assistance may be “grossed up” at a rate of 125% by your lender and added to your income total to help offset debt.
Why Is DTI Important for Loan Qualifying?
The VA requires lenders to verify that you have the ability to repay your loan. Why? Because it’s the lender who originates and funds the loan, while the VA guarantees a portion of it.
The VA home loan program is designed to help Veterans buy homes. If a VA loan were to put a Veteran in a worse financial position, that would be counterproductive to the program’s purpose. That’s why DTI is used to determine your ability to pay, and to help ensure all qualified applicants are approved.
How to Compensate for a High DTI Ratio
Remember our earlier example that resulted in a 43% DTI ratio? Well, that number may be a tad high for VA loan qualifying. That’s where some wiggle room comes into play. It’s possible you could pay down your debts enough to hit the 41% mark.
Additionally, the VA has what’s known as compensating factors, or ways to make up for a DTI ratio that doesn’t quite cut it. According to the VA, valid compensating factors should show unusual strengths rather than just satisfy basic qualifying requirements. A considered factor should also be able to counteract a specific weakness in the loan application.
If your DTI is higher than 41%, it may not be the end of your VA loan journey. Talk with a loan officer. Maybe you have compensating factors that could help you qualify.
Here are some common compensating factors:
- Excellent credit history
- Conservative use of consumer credit
- Minimal consumer debt
- Long-term employment
- Significant liquid assets
- Sizable down payment
- Equity in refinancing loans
- Little or no increase in shelter expense
- Military benefits
- Satisfactory homeownership experience
- High residual income
- Tax credits for child care
- Tax benefits of homeownership
If you have them, compensating factors can make all the difference in your loan being approved when DTI or residual income is marginal; however, if your credit score is below the lender’s minimum requirement, even the most powerful compensating factor won’t help.
Your DTI ratio is just one piece of the VA loan qualifying pie. Of course, your complete credit history and FICO score, as well as income, will be considered in the approval process.
