4 Ways to Decrease Your Debt-to-Income Ratio for a VA Loan
HOW TO QUALIFY FOR A VA LOAN
In order to qualify for a VA loan, you must be either an active-duty military member or a veteran who has:
- Served 90 consecutive days of active service during wartime, or
- 181 days of active service during peacetime, or
- 6 years of service in the National Guard or Reserves, or
- You are the spouse of a service member who has died in the line of duty or as a result of a service-related disability.
In addition to the above, the property you want to purchase must meet certain safety standards and building codes, and you must be able to meet the lender’s specific credit and income requirements, including having the appropriate debt-to-income ratio.
The VA does not specify a maximum debt-to-income ratio to qualify for a VA home loan; however, most lenders mark the cut-off at 41%.
But what does that mean for you?
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WHAT IS A DEBT-TO-INCOME RATIO?
A person’s debt-to-income ratio is the difference between their income and their debt, more specifically, their monthly take-home income versus their total monthly debt obligations (car payments, credit card interest, etc.).
In order to qualify for a VA home loan (and most other home loans) a person’s overall monthly indebtedness (how much debt they have to pay off each month) cannot exceed 41% of their monthly income.
If you have too much debt, meaning your debt-to-income ratio would be higher than 41% with the VA loan, then you may not be able to qualify for the size of home you want, even though you may technically be able to afford the payments with your take-home income.
A simple solution to this is to buy a home that keeps you under the 41% debt-to-income ratio or wait to buy a home until your debt-to-income ratio has more room for that home of your dreams, or at least the home you are looking to purchase.
HOW TO DECREASE YOUR DEBT-TO-INCOME RATIO
In order to qualify for a VA loan, you may need to lower your debt-to-income ratio. To do this, you will need to do one of two things: increase your income or lower your debts.
Here are a few of the best ways to lower your debt-to-income ratio without radically changing your lifestyle:
1. MAKE EXTRA PAYMENTS
Consider making higher or extra payments towards your car loan, credit card statements, and other loans. When making the minimum payments, you are mostly paying interest and not impacting the principal amount on your loan or credit card debt. By making extra payments, as you are able, you can often put that money directly to the principal of your loan, shortening the length of your loan and/or lowering the amount of interest due each month and over the life of the loan.
2. AVOID NEW DEBT
In order to lower your debt-to-income ratio, it is important not to take on new debt, as that will simply raise your debt-to-income ratio. By reducing the number of items you purchase on your credit card (consider using a debit card, or foregoing unnecessary purchases altogether), you will, at a minimum, keep your debt-to-income ratio from increasing.
It does not always make sense to refinance your debt, but in some cases, this can be a great way to reduce your monthly obligations by lowering the interest rate on outstanding debts. This can be very helpful for student loans and car loans that were taken on at higher interest rates. Keep in mind when refinancing your student loans that by privatizing them you may have to forego future student loan forgiveness that may be enacted by congressional legislation.
4. INCREASE YOUR INCOME
This is easier said than done, but by increasing your income, your debt-to-income ratio will naturally be lower. This is not easily done while serving in the military as your income is set to a structured schedule, however, if you have a spouse who is able to increase their income, that can give you the wiggle room to fit under the ratio and qualify for a VA loan.
Qualifying for a VA loan may take sacrifice on your part, but the benefits of homeownership often outweigh the budgetary discipline needed to reduce your debt-to-income ratio so that you qualify for the home that fits you and your family’s wants and needs. And when you do qualify for a VA loan, let Hero Loan handle the details, for a quick and easy lending experience when buying your home.