When you're considering buying a home and using your VA home loan benefit, one of the first questions you want answered is "How much can I qualify for?" VA loans are guaranteed, meaning any loan that the VA lender approves, has a government-backed guarantee of 25 percent of the loan amount. As long as the lender followed established VA lending guidelines, the guarantee is in place. The VA doesn't approve the loan but establishes specific rules that lenders must follow in order to receive the VA guarantee. One of those rules limits how much you can borrow based upon a formula called the debt to income ratio, or simply "debt ratio."
Your VA Debt Ratio
Your VA debt ratio is a number expressed as a percentage and is calculated by dividing certain debt obligations by your gross monthly income. If your monthly bills, including your mortgage payment add up to $2,000, and your gross income is $6,000 each month, your ratio is 2,000 divided by 6,000, or .30. The maximum VA debt ratio limit is 41 so in this example, the ratio of 30 qualifies.
The debt ratios is made up of your principal and interest payment, one-twelfth your annual property tax and homeowner's bill along with any other monthly fees associated with the mortgage such as homeowner's association or condominium fees.
Other debt that must be included to calculate your VA debt ratio are credit obligations such as a car loan, minimum credit card payments and student loans, among others. If the payment appears on a credit report, it's likely the payment will be included in your debt ratio calculation.
Monthly bills that aren't part of your debt ratio are things such as utility bills, cell phone bills, food and entertainment. So, let's calculate a VA debt ratio.
The loan amount is $300,000, the loan is a 20 year fixed rate loan at 3.00 percent. Property taxes are $3,000 per year and homeowners insurance is $1,500 per year. There are no additional fees. The payment is:
Principal and Interest $1,664
Monthly Prop. Tax 250
Monthly Insurance 125
Total House Pymt. $2,039
Adding Total Debt
Now let's add a car payment of $400 and student loan payments totaling $200:
Car Payment $ 400
Student Loans 200
Total House Pymnt. 2,039
Total Monthly Pymnt. $2,639
If the gross monthly income is $7,000 the debt ratio is 2,639 divided by 7,000 for a ratio of .38, or 38. Since the ratio is below the maximum ratio of 41, the borrower qualifies for the loan based upon debt ratios.
Maximum Loan Amount
When a loan officer calculates your maximum VA loan amount, your gross monthly income is added up then multiplied by .41. If your monthly income is $6,000, then your total debts can't exceed 41 percent of $6,000, or $2,460.
Next, the loan officer subtracts qualifying debt from the $2,460 figure. Say that there is a $300 car payment and an installment loan of $150. The result is now $2,010.
According to VA lending guidelines, $, 2010 is the maximum allowable amount you may have for a mortgage payment including principal and interest, taxes and insurance. If you've yet to pick out a property and don't have tax and insurance information, your loan officer will use estimated figures.
If annual property tax bills for properties similar to ones you're interested in are about $2,000 then the monthly insurance payment is $167. You can get a quote for a homeowners' insurance policy from an agent but a general calculation is one-half of one percent of the loan amount. In this example the monthly insurance payment is $83.
Finally, the loan officer subtracts the estimated tax and insurance payment from your maximum allowed amount of $2,460 leaving $2,210 available for principal and interest. Next, the loan term and interest rates are used to calculate the loan amount associated with a $2,210 payment using current rates. If the loan is a 15 year mortgage at 3.50 percent with a $2,210 principal and interest payment, the loan amount result is just over $309,000, your maximum VA loan amount.
The debt ratio is just one requirement a lender must follow when approving a VA loan request. You must also qualify with other standards including credit, residual income and steady employment. Even if your debt ratio is 20, well under the 41 limit, if your credit is below 620 it will be difficult to get a loan approval from a VA lender. If your income isn't steady or you're not currently employed full-time, you may not be approved.
And one last note, just because you debt ratios allow you to borrow $309,000 that doesn't mean you're required to. Borrow what you feel comfortable paying each month. Evaluate the various loan choices you have and discuss these options with your loan officer. Getting your first VA loan is a journey, but you need to know where to start.