In this part of our Illinois VA mortgage loan series we will explain the debt to income ratios used to qualify a borrower for a VA home loan.
41% is the Magic Number
The ratio is a fairly simple math formula. The first step is to determine the borrower’s monthly gross income. This is income from all sources such as full time employment, military retirement or disability pay, money from the reserves, and any part time jobs. After determining the income amount the next step is to calculate the monthly debt. This is simply adding up all of the payments the borrower currently makes on existing loans such as credit cards, automobile loans, student loans, unsecured loans and other type of debt. The proposed mortgage is also included with this amount. This does not include items such as utilities, car insurance, groceries or clothing.
Once the total debt and total income are calculated the numbers are put into the following formula.
Total Debt/Total Income = Debt-to-income Percentage.
For example, if a person’s existing debt payments are $653 and the proposed house payment is $927. The two combined would be $1,580. If the person’s total monthly income is $4000 then their debt-to-income ratio is 39.5% which is below the 41% guideline.
Residual Income can Help
If a person has a ratio higher than 41%, they may still get qualified for the loan. If their residual income is $1,500 or more there is a good chance that the loan will be approved. This is a decision made solely by the lender and needs to be discussed with your mortgage loan officer before proceeding.
The next part in the series will explain the VA funding fee.
For additional information, visit our Illinois VA loan page of our website. If you have questions or want to see if you qualify, contact me below or apply online!
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