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VA Loans: The Numbers you Need to Know

Mortgage financiers will deeply scrutinize your significant and recurring debts as part of the pre-qualification process. Such debt may include rent expenses, study loans and car expenses. Generally, being debt-free is not an eligibility criterion for a VA loan.

But you still require a reasonable balance between monthly expenses and earnings. If you have uncontrolled debts, lenders may have a good reason to deny you a VA loan.

Here is what you should know about DTI guidelines, residual value, and other vital financial aspects that affect your VA loan eligibility.

Debt-to-Income Ratio

The Veterans Affairs Department does not impose an income limit on potential borrowers.

You do not need to earn a certain hourly, monthly or annual wage to be eligible for borrowing. Instead, lending institutions collaborating with the VA determines what debt limit you can manage by correlating your substantial monthly debts to your income.

First, mortgage financiers will calculate your substantial monthly debt bill. Mortgage providers only consider recurring debts drawn from your account statements. In rare cases, they can also consider liabilities that do not appear on your credit records, such as child-care costs, child support payments, and even traveling expenses.

They will then divide your total debt by your cumulative gross monthly earnings before taxation.

A DTI ratio below 41% is safe, although you can still qualify for a VA loan if you achieve a stricter threshold for recurring (residual) income and stay within a lender’s DTI ratio cap. It all depends on the lending institution.

What if Your DTI Ratio Is Still Too High?

Well, three scenarios may help you overcome extremely high DTI, namely;

  • Earn more money and boost your income basket.
  • Payoff or eliminate all outstanding debt.
  • Negotiate a lower loan amount from your mortgage financier.

Residual Income

VA loans are among the most secure in the lending market because of the provision for residual income. The Veterans Affairs Department requires you to have a specific cash flow amount each month.

A stable cash flow ensures that you have enough money to support daily expenses such as food shopping and medical costs.

To determine your residual income, a financier will subtract your total monthly dues from your monthly gross income. If your DTI exceeds 41%, you must also exceed your residual income requirement by 20% to qualify for a VA mortgage.

For this reason, VA loans have a low foreclosure rate despite having no prerequisite for a deposit.

Manual Underwriting

A manual underwriting applies if an automated approval isn’t possible on your loan application. A human will manually use your financial figures to calculate your lending risk during the process.

Although manual underwriting is practical, most mortgage providers will be extremely cautious when handling a manual underwrite.

First, they wouldn’t want to fall into the trap of bad debtors who will not meet their financial obligations.

Secondly, the VA assurance on loans is only available to accredited lenders who adhere to the agency’s standards. If a lender deviates from the standards and issues a loan that leads to bad debt, the VA won’t cover its guarantee.

But why would a file fail to pass the automated approval system? Well, it mostly depends on your credit history.

Other factors include:

  • A shallow credit history.
  • Bankruptcy.
  • Defaulting on other federal loans.
  • Late payment on mortgages.

Preapproval Letters

Prequalification for a loan is not a surety of financing. However, it is a crucial stage that realtors and sellers appreciate. It demonstrates a mortgage provider’s trust in your capacity to pay the VA mortgage.

A preapproval letter contains a list of requirements you must meet for the loan process. These requirements protect you and the lender if the process doesn’t run as scheduled or your financial situation changes.

Here are five requirements of a preapproval letter:

  • Reasonable appraisal to endorse the value on the signed sales agreement.
  • Policy on acceptable title.
  • Acceptable flood certification.
  • Detailed termite inspection.
  • Final approval for underwriting.

Be sure to address these five prerequisites at a bare minimum for you to receive full loan approval. Most preapproval letters also state that variations to your credit, earnings, or other critical financial metrics may affect the validity of the document

A prequalification letter gives you a good idea of what you can pay and what financiers require. Loan prequalification also provides you with the energy and determination to begin a serious home search.

VA Loans: Negotiating Your DTI and Residual Income

VA housing loans provide distinct benefits to qualified veteran buyers, such as low-interest rates and access to a mortgage without paying a deposit.

If your DTI ratio is too high to meet official VA standards, you have alternative ways for eligibility. Financial institutions can approve your application based on your residual income.

The bottom line is that today’s VA mortgage rates are friendly, and you can get loan approval even with a DTI ratio exceeding 50%.

For more on how to negotiate your DTI and residual value, contact an approved VA mortgage provider.

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