What Is the Debt Ratio on a VA Loan?

Debt-to-Income

Lenders use debt-to-income (DTI) ratios when underwriting loans to determine how much money you currently owe your creditors and how much income you receive. To calculate your DTI, divide your total monthly debt payments by your gross income, which is your before-tax income. The VA states that to qualify for a VA loan, no more than 41 percent of your monthly income should go toward debt payments. Your DTI ratio includes your proposed mortgage payment. If your DTI level exceeds the acceptable limit, you can either apply for a smaller loan amount or find an additional income source.

Lenders underwriting VA-backed loans must obtain income verification for the prior two years. Your employer must submit a verification of employment form to your lender, and the loan must close within 120 days of the date on that form. You also have to provide your lender with two years of W2 forms and pay stubs for the last 30 days. The VA regards anyone who has been employed for less than 12 months as "unstable" in terms of income. However, lenders can write loans for such people if some kind of extenuating circumstances exist that suggest the person in question will have stable employment going forward. Self-employed people must have been self-employed for two years and must provide the lender with two years of tax returns and a personal financial statement.

Lenders must check your credit report and include all debts listed when calculating your DTI ratio. However, lenders can exclude debts that have a remaining term of less than 12 months from the DTI ratio as long as payments on those debts are not large enough to have a major impact on your financial situation. The VA would typically classify a home loan or car payment as significant, while a lender might exclude a $15 or $20 dollar monthly payment on an unsecured loan. The lender must also obtain evidence related to any loans not shown on the credit report, such as 401k loans.

Technically, lenders do not have to use DTI ratios when underwriting VA loans. The VA handbook states that lenders can also use the "residual income calculation" as an alternative to DTI. This method involves adding up your debt expenses and determining whether you have enough residual income to cover your basic living costs. The VA has residual income minimums that are based on your household size and where you live, but lenders can approve you for a loan if you exceed the residual income minimum yet exceed the DTI ratio of 41 percent.