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Adjusting Your VA Loan Debt Ratio

By: Grant Moon 11/01/12 05:43 pm

Adjusting Your VA Loan Debt Ratio

 

Your debt-to-income ratio, or simply “debt ratio” is a number arrived at by dividing your monthly housing and credit obligations by your gross monthly income.  The standard maximum VA debt ratio is 41, meaning the VA lender likes to see your monthly debts be no greater than 41 percent of your gross monthly income.  But what happens if your gross monthly income is higher than 41?  What if it’s much higher, say 45 or more and your lender is balking. What can you do?

The first answer is obvious: borrow less. That’s right, either put down more money on your dream home or find a less expensive house to buy.  If your debt ratios are 45 and your lender is not all that happy with your ratio, there’s a reason; that high of a debt ratio indicates a greater likelihood of default.  The 41 VA debt ratio has been a staple for decades and is one of the reasons VA loans have the lowest delinquency rate of any mortgage product on the market.

Yet there are other ways to reduce our debt ratio besides borrowing less money.

The first way is to explore paying down debt.  While this may not always be feasible it’s an option.  The best case scenario when paying down debt involves an installment loan with just a few payments still remaining.  In fact, some debts don’t require paying them off entirely in order to not be counted against your debt ratio.  For example, if you have 15 months remaining on a student loan and that loan is hurting your debt ratios, try paying down the debt to less than 10 months remaining.  Any installment loan with less than 10 months doesn’t have to count against your ratios.

Another way is to explore extending your mortgage term.  If you’re trying to qualify on a 15 or 20 year VA mortgage and your ratios are too high, run the numbers again with a 30 year mortgage term…your monthly payment will drop considerably and just might get you the approval you need.

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