What are the VA Guidelines for Income and Debt Ratios?

The VA offers a flexible mortgage program for veterans. If you serve at least 180 days during peacetime or 90 days during wartime (during most time periods), you may be eligible for the VA loan program. Eligible veterans can secure 100% financing for an owner-occupied home. If that’s not flexible enough, they also have the most flexible income and debt ratio guidelines out of many other loan programs.

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How Much Income Must you Make?

You need to make income in order to qualify for any loan, let alone a VA loan. Just like any other loan program, you must have money coming in from a reputable source and on a regular basis. Technically, the VA would like it if you had the same job/income for at least 2 years, but they don’t enforce this rule too strictly. What they do enforce is that you consistently make money and that the total amount that you make per year is about the same or higher. If you have decreasing income from one year to the next, it could raise a red flag on your application.

As far as how much money you must make, there isn’t a specific number. As long as you make enough to cover your monthly debts, including the new mortgage, and have money left over after doing so, you may qualify. The lender basically concerns themselves with the fact that your income is consistent and stable. If they see any reason to doubt that your salary will not continue for the foreseeable future (at least 3 years), they may require more verification to ensure that you can take on the new loan.

What are the Debt Ratio Requirements?

The debt ratios are where the VA differs greatly from many other loan programs. Why? The VA doesn’t really focus on any ratios. Instead, what you’ll hear the VA focusing on is your disposable income. This is the money you have left over after you pay all of your bills. This doesn’t mean the cost of daily living or even the cost of paying utilities or insurance. It means things like:

  • Mortgage payments
  • Car payments
  • Credit card payments
  • Student loans
  • Personal loans

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Basically, any bills that report on your credit report are a part of this equation. The VA then has specific amounts of disposable income each person must have based on the size of their family and where they live.

Here’s an example:

Joe is a veteran that is eligible for a VA loan. He is a family of five and lives in the Northeast. He applied for a mortgage that would have a total payment of $1,500 (principal, interest, taxes, and insurance). He also has a $300 car payment and $200 in credit card payments each month. His total monthly bills will be $2,000 if he gets the mortgage. Joe makes $4,800 per month. That leaves him with $2,800 in disposable income.

A family of Joe’s size in the Northeast must have at least $1,062 per month in disposable income according to the VA. Because Joe has $2,800 left each month, he would fit the bill.

If you calculate it, you’d see that Joe’s debt ratio is just about 42% as well. While technically, the VA allows a debt ratio up to 43% on the back-end, they might grant an exception for Joe if his was slightly higher because he has more than enough disposable income each month.

The VA focuses on the disposable income because they feel it’s a safer bet when determining a borrowers’ risk of default. They feel that a borrower that doesn’t have an adequate disposable income each month is at risk of defaulting on their loan. The VA feels this way because they think if a borrower has to sacrifice on daily living expenses, they may choose to default on their mortgage rather than have to sacrifice the way they live.

Does this mean it’s okay to have a debt ratio higher than 43%? It depends on the lender. Some will definitely require you to stay at 43%, while others will be a bit more lenient, assuming you have enough disposable income to cover the VA’s requirements.

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