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when it comes to getting a VA home loan one of the key financial metrics for lenders is DTI debt to income ratio this underwriting guidelines looks at the relationship between your gross monthly income and your major monthly debt and it gives lenders a look at your purchasing power and your ability to repay a mortgage loan a mortgage lending generally involves two types of DTI ratios there's a front-end ratio that compares just the new housing cost to your monthly income there's also a back-end ratio that looks at all of your major monthly expenses including that new mortgage payment the world the VA lending looks solely at the back end ratio now VA views DTI ratio as a guide to help lenders and it doesn't set a maximum ratio the borrowers have to stay under but bear in mind the VA also doesn't make home loans and so mortgage lenders they'll often have in-house caps on DTI and these can vary depending on your credit your finances and more only certain types of debt and income count toward the DTI calculation lenders will consider revolving and installment debts those major ones and they're mostly pulled directly from your credit reports these are things like mortgages car loans student loans credit card debt and more but lenders can also consider obligations that don't make your credit report so things like child care costs alimony and even commuting expenses in some cases if you have collections or charge-offs on your credit lenders won't typically factor those into your DTI unless you're making regular monthly payments on those debts now the biggest debt is likely to be your projected monthly mortgage payment and that includes the principal and interest on the loan along with the estimated escrows so it's the full P i TI payment that lenders are gonna look at when calculating DTI now on VA loans lenders will also include an estimated cost for monthly utility bills and when we look at an example in just a minute I'll show you how they do that in practice now lenders are gonna add up all of your major monthly debts and they're going to divide them by your gross or your pre-tax monthly income so here's an example of how it can work in practice and so to keep the numbers nice and round that your your gross monthly income is $5,500 and in terms of debts these are the ones that we're gonna work with for this example so we'll say that you're paying $200 a month for your car loan that your student loan payment is a hundred and fifty dollars a month you've also got credit card bills that you're standing on top of and they'll say you're paying $100 a month toward that whether it's child care child support or alimony just for the sake of an example we said this is coming out to three hundred dollars every month that you're paying now the single biggest expense again for most people is going to be that new monthly mortgage payment for our example we're saying that the full payment for this borrower is $1,200 and lasts for the estimated utilities the way that this works in VA lending is that the homes square footage gets multiplied by 0.14 percent so for our example house we're gonna say that based on the square footage that cost is going to be $200 a month so lenders are gonna add up all of these regular recurring expenses and that comes out to 2150 they're gonna divide it by your gross monthly income that $5,500 and this borrowers example DTI is 39% now it's important to understand that mortgage lenders don't consider all income equally so some forms of income will absolutely count toward qualifying for a mortgage no problem but other forms like commission self-employment income and others those will often require at least a two year history and some types of income like GI Bill housing allowances simply won't be counted as effective income toward a mortgage now the flip side to that is that lenders also don't count all of your debts so things like cell phone bills car insurance health insurance groceries those aren't up here because they're not factored into that overall DTI ratio calculation so as we talked about before lenders can and do set their own benchmarks for maximum allowable DTI ratio and those caps can vary based on a host of factors now some lenders out there might be fine with you having a DTI ratio of 50% there are some out there depending on your specific situation that can go a lot higher than that in some cases that often depends on your credit your overall lending profile and then of course their in-house guidelines now the VA doesn't create a maximum level for DTI but what they do offer and they set in stone is this dividing line for prospective borrowers so veterans and military members with the DTI ratio above 41% that's the dividing line if your DTI is above 41% you're going to face additional financial scrutiny when it comes time to get a VA loan and in these cases borrowers will get an up-close look at the link between DTI and the villa's guideline for discretionary income which is known as a residual income so the residual income guidelines require that borrowers have a minimum amount of discretionary income left over each month after paying their major expenses and that minimum amount it varies depending on the size of your loan the size of your family and where in the country you're buying so for example a Midwestern family of four they would typically need to have a thousand and three dollars left over each month and residual income after paying their mortgage and their major debt obligations but VA buyers need even more residual income if their DTI ratio is above that dividing line that 41% figure so these borrowers they have to exceed their residual income guideline by 20% and here's how this math ends up working so this example family of four in the Midwest if their DTI is above 41 percent they're gonna need additional residual income and so you multiply the standard requirement by 20% and that comes out to right about $200 so you add those two together and instead of needing a thousand and three dollars left over each month in residual this family now needs $1,200 a month at least at the current loan amount and that's also something to keep in mind a huge piece of your DTI ratio is your projected monthly mortgage payment so having too high of a DTI ratio can force borrowers to make tough decisions one is to just hold off on buying a home until they have a better balance of debts and income another option is to seek a lower loan amount so for example if your DTI is too high with a $300,000 loan you might be able to move forward with a $250,000 mortgage now readjusting your home buying budget is often disappointing and it might not be realistic depending on your real-estate market your needs and other factors but it's an option when dealing with a high DTI talk with a veterans United loan specialist if you have questions about your debts your income and your purchasing power [Music]