In June of 1944 the Veterans Administration introduced the VA home mortgage program for veterans returning from war overseas. Over the years the program has been modified to allow many veterans the opportunity to buy a home at affordable rates without the need for paying money down at purchase.
Available to Wide Range of People
As the name implies, the loan is mainly designed for people that have served in the military. However, it is not restricted to only war-time service. Illinois Veterans that have served during times of peace, as well as members of the reserve or National Guard may also qualify if they meet the service period requirements. Within the past few years the rules were changed to allow the Veterans spouse to qualify for a home loan.
2nd Most Important Criteria: the debt ratio
Besides meeting the military service requirements an Illinois Veterans mortgage applicant will also need to meet the debt ratio requirement. This ratio is 41%. It is very rare that a veteran will get approved for a home loan if their debt to income ratio is higher than 41%. Therefore, it is important that potential IL VA mortgage applicants understand how it is calculated.
Gross, not Net
First and foremost, the debt ratio calculation uses the veteran’s gross income. This is the income that a person earns before taxes, insurance, retirement savings and any other deduction is removed. It is also calculated on a monthly basis.
For example, if a veteran has a job that pays him $15 per hour and he works 40 hours per week then the person earns $600 per week ($15 x 40 = $600). Since there are 52 weeks in a year the veteran is considered to earn $31,200 annually ($600 x 52 = $31,200). Finally, the $31,200 is divided by 12 to come up with $2,600 per month gross income.
Debt, not Utilities
After determining the veteran’s gross monthly income the mortgage lender will look at the existing debt. All debts that have a monthly payment will be considered part of the calculation. This includes car loans, credit cards, student loans, and any unsecured debt. Items like utility bills are not factored in to the calculation.
So, for example, suppose a veteran had the following debts:
· Automobile loan - $289 per month
· Credit cards - $76 per month
· Unsecured loan - $115
Total debt payment per month = $480
Using the earlier example of $2,600 monthly income then 41% of the $2,600 is $1066. This would mean that the veteran could possibly qualify for a mortgage with a monthly payment of $586 ($1,066 income minus $480 debt = $586 left for mortgage payment).
Obviously, these are example numbers. Your exact numbers will likely be different.
Another Requirement: Residual Income
Along with the service period restrictions and the debt to income ratio there is another crucial requirement for VA mortgages; the residual income factor. Basically, this means that the veteran should have some money left over after accounting for all debt and the mortgage payment. This requirement, along with the debt to income ratio, has been one of the main reasons why VA mortgages have such a low rate of default.
For Illinois Veterans here are the guidelines for residual income based on size of family:
· Family of 1 person: $441
· Family of 2 people: $738
· Family of 3 people: $889
· Family of 4 people: $1,003
· Family of 5 people: $1,039
· Family of 6 people: $1,119
· Family of 7 people: $1,199
If you are an Illinois Veteran that meets the service requirements, the debt ratio and the residual income test you could be a candidate for a VA mortgage. With rates so low this is a great time to consider buying a home and establishing your part of the American Dream.
Related VA Mortgage Resources:
VA Loan Preapproval Process - Anita Clark
VA Loans: 3 Well Deserved Benefits For Veterans - Loans101
5 Ways that VA Mortgages Trump Other Kinds of Loans
VA Joint Loan Options
VA Loans: The Ins and Outs of How to Acquire One