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How to Get Debt Under Control and How it Will Impact VA Loan Eligibility

When you’re applying for a mortgage, a VA loan can often be a good option. You’ll have to meet certain requirements - including the amount of debt you have versus how much income you bring in - but this type of loan comes with several advantages.

The following explains more about VA loans, including how to get debt under control to help with your loan approval:

What is a VA loan?

A VA loan is a mortgage loan that’s available to many military service members and veterans. The VA doesn’t actually issue the loan but instead partners with private lenders to offer this type of loan. It guarantees a percentage of every VA mortgage loan, enabling this type of loan to offer several benefits.

Before taking out this type of loan, you’ll need to make sure if it’s right for you, but it does offer the following advantages over traditional mortgage loans:

  • No downpayment - Unlike some other home mortgage loans, a VA loan doesn’t t require a downpayment.

  • No PMI - Lenders typically require the buyer to pay Private Mortgage Insurance (PMI) each month on their home if they’re making a down payment below 20 percent. This additional payment can linger for months and only ends when you reach the 20 percent equity threshold. In contrast, a VA loan doesn’t require PMI.

  • No prepayment penalty - You won’t ever incur a penalty if you pay off a VA loan early. This is not always the case with other types of loans.

How do you qualify for a VA loan?

You’ll need a certificate of eligibility, which you can get online or your lender can get it for you. You’ll also need to meet financial requirements to show your lender that you can make your loan payments on time and aren’t likely to default on your loan.

Are there any additional fees associated with a VA loan?

Although a VA loan lets you avoid paying PMI, you’ll have to pay a one-time funding fee. This is preferable to paying PMI month after month, and the higher your down payment, the lower your funding fee will be.

How does debt affect your ability to get a VA loan?

Mortgage lenders can set their own requirements, but the VA’s guidelines recommend that your debt-to-income ratio is no more than 41 percent. This number comes from dividing your total monthly debt by your monthly gross income (before taxes). It represents how much you owe each month vs. how much you earn.

The following monthly payments (among others) are used to calculate your debt:

  • Monthly rent or current mortgage
  • Minimum credit card payments
  • Student loans
  • Auto loans
  • Alimony or child support
  • Other debts

Couple managing the debt

How can you get debt under control?

Getting your debt can not only help improve your chances of qualifying for a VA loan, but it can also greatly improve your financial situation.

The following are some ways you can get debt under control:

  • Stop accumulating more debt - Don’t use your credit cards anymore, and don’t take out any new personal loans.

  • Find out where you stand- Take a good look at your finances and add up all your debt so you know exactly where you are.

  • Track your spending- For at least a month, keep track of every cent you spend. If you’re like most people, you’ll find some surprises. Even relatively small expenditures, such as eating lunch out a few times a week, can add up quickly.

  • Reduce your spending- Tracking your spending should give you some good ideas on how to reduce your spending. Do you have an expensive cable package you could drop? Do you buy books that you could borrow from the library instead? Every dollar you don’t spend in this way could be applied toward reducing your debt.

  • Start attacking your debt (except your rent or mortgage) - Some people recommend starting to pay down your debt that has the highest interest rate first, while others recommend paying off the smallest debt first so you’ll have a faster feeling of accomplishment.

  • Keep your momentum going - As you pay off one debt, take what you were paying toward it and apply it toward the next debt.

  • Build an emergency fund - Save a certain amount each month to build an emergency fund. Start with $1,000 and keep building from there. An emergency fund can help keep you from incurring more debt when, for example, your car needs a repair.

Wrapping it up

A VA loan may be a good option if you’re buying a home and qualify for one through a combination of your military service and finances. And by reducing your debt, you’ll have a greater chance of securing this type of loan as well as giving your finances an overall boost.

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