What Is a VA Loan Debt to Income Ratio?
- The purpose of a debt-to-income ratio for any lender is to determine your maximum mortgage loan limit. Lender's divide this into a front-end and back-end ratio. Lenders calculate the front-end debt-to-income ratio by adding up your fixed monthly expenses such as car and insurance payments and dividing by your gross monthly income. To determine the back-end ratio, lenders add together all fixed monthly expenses plus your expected new mortgage payment and divide that by your gross monthly income.
- Traditional lenders use both the front and back-end debt-to-income ratios to determine mortgage loan limits, but the VA only uses the back-end ratio. The maximum debt-to-income ratio for VA loans is 41 percent. This means the VA will allow up to 41 percent of your gross monthly income to go toward your monthly debt payments including fixed expenses and your expected new mortgage payment.
- The VA may allow you to go over the 41 percent debt-to-income ratio if you have exceptional credit, which is generally a credit score above 750 points. Other considerations for exceeding the 41 percent limit include a low amount of debt, demonstrable long-term employment, or if you have a substantial number of assets. Another consideration is if you have residual income outside your regular military and military retirement pay.
- You should only seek approval for a VA loan with a debt-to-income ratio over 41 percent if you are certain that your financial circumstances -- including your monthly income and monthly debt -- will not change dramatically in the future. Exceeding the debt-to-income ratio limit without carefully considering the possibility that your current financial situation may change can lead you into a higher mortgage than you can afford. This situation can lead to losing your home to foreclosure.
