Debt ratios are one of the primary ingredients involved while evaluating a VA loan application. Along with a credit and employment history, VA guidelines require the lender document an ability to comfortably repay the mortgage along with other monthly obligations. This process is one of the reasons VA loans have such a high performance and the lowest default rate when compared to other mortgage loans. The debt ratio established for VA loans is 41, or 41 percent of gross monthly income although that ratio can be a little higher and still receive an approval. Want to know how to figure your own debt ratio in a similar fashion that VA lenders do?
The first step is to take the amount you’re going to borrow, or at least a good estimate. There are various online mortgage calculators you can use and they’re easy to find. Simply input the loan amount, the interest rate and the loan term. For instance, you might put in $200,000, 3.75% and a 30 year term. The result is the principal and interest payment. In this example, that’s $926.
You’ll also need to include a monthly amount for property taxes and insurance. This means you’ll need to know the property tax rate yet most homes listed for sale online list the annual property tax. Divide that annual amount by 12. Next, take an estimate of an insurance premium. You can call your agent for a general quote or multiply the loan amount by 0.50% then divide by 12. If the monthly tax payment is $150 and insurance $75, your housing payment adds up to $1,151. But you’re not yet finished.
You need to also include other monthly credit obligations such as minimum credit card payments and installment loans that have more than 10 months remaining. If a credit card payment is $100 and an automobile loan is $350, then your total debt is $1,151 + $100 + $350 = $1,601. The final result? Divide $1,601 by your gross monthly income. If your gross income is $4,500, then the ratio is $1,609 divided by $4,500 and the result is .35.
Be careful, this is only for an estimate. You’ll need to speak with a loan officer to get an accurate ratio as well as prevailing rates. And don’t come to the conclusion your ratios are too high or too low on your own. But if you just want to know before you get too far into the process, this is how it’s done.