Having the benefit of a VA home loan entitlement is an advantage that only a few can claim. A veteran, active duty service member and other National Guard and Reserve members can use it. Claiming your eligibility is a process you can work directly with the VA to obtain or you can work with a VA lender to establish your VA home loan eligibility. But way beyond getting your eligibility, you simply want to know how much you can qualify for. How does a VA lender determine that?
First, it’s a moving target. A VA lender will speak with you, run some numbers and by using current market rates, the lender is able to give you a qualifying range. You might hear something to the effect of “You can qualify for around $300,000” or something similar. There’s a bit of inherent leeway because interest rates as well credit can impact a qualifying amount.
Yet the VA lender does follow a standard pattern. The lender first needs to know the gross monthly income of all the borrowers applying for the mortgage. From that, the loan officer multiples that by .41, or 41 percent. This number is the maximum debt-to-income ratio allowed on VA loans and is a comparison of current monthly obligations and income. The lender then backs out consumer debt with an eye on current interest rates and arrives at a qualifying loan amount.
For example, a borrower makes $5,000 per month and currently has two credit accounts, a car payment of $400 per month and a minimum credit card payment of $100. The lender multiplies $5,000 by .41 to get $2,050 then subtracts $500 to arrive at $1,550. This amount is what can be used for a housing payment.
Now say the monthly property tax payment is $100 and homeowner’s insurance is $50, leaving $1,400 available for principal and interest. If a 30 year interest rate is at 4.00 percent, the result is $293,245. It’s a process indeed but loan officers have done that procedure hundreds if not thousands of times. But that’s how it’s done.