Have you ever wondered how much you can borrow to finance a home using your VA home loan benefit? It’s really not a moving target but if you’re a first time home buyer or simply want to know how VA mortgage lenders figure out how much to lend, here’s how VA lenders do it.
The first step is calculating your maximum debt to income ratio and is expressed as a percentage. The maximum debt to income ratio for VA loans is 41%, or simply “41.” There are exceptions to this guideline but most VA loan approvals are at or below the magical 41 number.
The next step considers your gross monthly income, the income before anything is taken out. Now multiply this figure by 41. That’s how much the VA will allocate for monthly debt obligations for things such as automobile or minimum credit card payments. It doesn’t take into account items such as your cell phone bill or electricity, only obligations that would appear on your credit report. For example, if your gross income is $10,000 the maximum monthly debt is $4,100.
By subtracting a car payment of say $500 and a credit card payment of $150, there is $3,450 left to be applied for the mortgage payment. Using prevailing rates and selecting a loan term from 10 to 30 years to calculate a principle and interest payment, this amount is added to the monthly property tax and homeowner’s insurance payment, plus any condo or association fees.
That’s really all there is to it. When rates are low borrowers can borrow more and when rates go up they can borrow less. That’s the dynamic between rates and affordability. If you’d like to know how much you can borrow, you’ll need to call a qualified loan officer with VA lending experience who can walk you through the process.