VA Loan Debt-To-Income Ratio (DTI): What Are The Limits For Home Loans?

If you are or have served in our nation’s armed forces, you’ll be happy to learn about Department of Veteran Affairs (VA) home loans when you’re ready to buy a house. The VA Guaranteed Home Loan is a valuable piece of your compensation for your service, and it will likely save you thousands of dollars over the life of your mortgage loan.

The VA home loan program is designed to be flexible and affordable and to encourage active-duty, reserves, National Guard personnel, veterans and eligible surviving spouses of service members to purchase a home.

Let’s take a deep dive into how the VA loan program handles debt-to-income (DTI) requirements.

What Is The Maximum DTI For A VA Loan?

The short answer is that there is no limit set by the VA. Instead, the VA leaves it up to VA-approved lenders to set their own credit requirements. It also relies on automated underwriting systems to make judgments.

Remember, the VA doesn’t actually make home loans. It insures the loans a private lender makes to eligible VA loan applicants.

How Does Debt-To-Income Ratio (DTI) Work?

Your debt-to-income ratio (DTI) tells lenders just how heavy your debt load is, and they use it to help them predict whether you’ll be able to make your monthly mortgage payments.

How Is DTI Calculated?

DTI is easy to calculate. First, add up all your monthly debt payments. Do not include recurring expenses, like your electric or grocery bill. Then, divide the total amount of your monthly debts by your gross monthly income. You’ll end up with a decimal number. Multiply by 100 to get your DTI ratio as a percentage. For example, a DTI calculation of .43 × 100 = 43%.

What Is A Good DTI To Have When You’re Applying For A VA Home Loan?

Ideally, lenders love to see applicants with DTIs around 36% or less. In general, conforming loans – home loans made by private lenders and later sold to Fannie Mae and Freddie Mac – cannot exceed a 45% DTI. At a 45% DTI, applicants must meet strict credit score and down payment requirements.

As a general rule, lenders are unwilling to lend to buyers who have a DTI of 50% or more. VA loans can be an exception to this rule.

Housing Expense Vs. Overall DTI: What’s The Difference?

Another metric lenders consider in addition to your overall DTI is your housing expense ratio. That’s calculated by adding up just your housing costs and dividing it by your gross monthly income. For renters, that’s simply rent. For homeowners, it would include your PITI, or your principal, interest, property taxes and homeowners insurance premiums.

Some lenders refer to the widely accepted rule of thumb – called “the 28/36 rule” – of home affordability. That rule would apply to a VA mortgage loan applicant who spends 28% of their monthly gross income on their housing expenses and no more than 36% on their overall debts – including student loans, car payments and credit card debt.

Keep in mind that those guidelines are likely unrealistic if you live in one of the more expensive areas of the U.S., and most lenders realize how difficult it is to maintain a low debt-to-income ratio, particularly in these inflationary times.

Is It Bad To Buy A House With A High DTI?

There’s a reason Fannie Mae and Freddie Mac no longer buy home loans issued to borrowers with a DTI over 50%. Before the 2008 financial crisis, there was no requirement for lenders to consider an applicant’s ability to repay their mortgage loan. In fact, there were very few requirements for the loans these government-sponsored enterprises would purchase.

Regulations put into place after the recession require lenders to consider an applicant’s ability to repay, and DTI is its best predictor. The financial stress of carrying heavy loan debt can take a significant toll and leave borrowers at risk of mortgage default and a foreclosure action against the home.

Because the VA insures loans made to eligible service members, lenders are able to take more risk on applicants with higher debt levels than they might otherwise be. Still, it does no one any good to approve a mortgage that, in all likelihood, the home buyer will not be able to afford. Beyond what a lender says you can spend, you have to consider your budget and comfort level.

What Should I Do If I’m Applying For A VA Loan And I Have A High DTI?

The first step is to apply for approval or talk with a mortgage expert about whether you are a candidate for a loan. If it looks like your DTI is too high, you can either reduce your debts or increase your income to reduce your DTI percentage.

Reduce Your Debts

Reducing your debts before applying for your VA loans, if your circumstances allow you to put off searching for a new home, will significantly improve your chances of getting approved. There are plenty of strategies to help you pay down your debts quickly. However you decide to do it, the important thing is to make reducing your primary debt your mission for the next year.

Refinance To Consolidate Your Debts

If you already own a home that you purchased with a VA loan, you might be able to benefit from a VA refinance. If you can qualify for a lower interest rate than you were originally approved for, you might benefit from a VA IRRRL Streamline refinance. Service members may benefit from looser credit score or DTI requirements for this type of refinance.

You might also have built enough home equity to qualify for a VA cash-out refinance loan. A cash-out refinance for debt consolidation purposes allows you to take some of the equity out of your home to repay your debts and consolidate multiple payments into one, low-interest monthly payment.

Raise Your Income

You can get a new – or second – job, ask for a raise or start a side hustle. Make sure you dedicate all that new income toward paying off your current debt.

The Bottom Line: VA Loans Have Flexible Requirements To Get More Service Members Into Their New Homes

VA loans are generally the most advantageous loans available for borrowers, and lenders will give eligible applicants every benefit of the doubt possible. That includes taking a lenient view of high DTI ratios without allowing a service member to make an ill-advised decision about how much home they can afford.