How to Determine Eligibility for a VA Loan
When you begin your homebuying journey, you’re going to deal with some pretty large numbers. For many Veterans, those numbers can be a bit intimidating.
Talking to a VA lender about your home loan affordability is always a smart first step during the homebuying process. However, powerful tools exist that eliminate the fear of purchasing a home you can’t afford, and doing so will give you a realistic idea of how much VA home loan you can afford.
To help you qualify for a mortgage that meets your personal and financial needs, input your information to determine how much home you can afford using this simple VA loan affordability calculator.
What Factors Determine How Much Home You Can Afford With a VA Loan
As a Veteran, you gain access to the most powerful mortgage product available today — the VA home loan, and there is a level of solace in knowing how much home you can afford.
But, qualifying for a VA loan doesn’t guarantee you’ll get a mortgage or buy a house you can comfortably fit in your budget. So, let's take a look at three critical components that factor into the calculation of VA home loan affordability.
Your gross income is your total pay before deductions and helps determines how much house you can afford. Unless you can pay for a home in cash, you’ll need a stable income to make your monthly mortgage payments.
Lenders will need to verify income by providing copies of your W-2’s, pay stubs, 1099s, disability award letters, proof of self-employment and more.
The more income you earn, the easier it will be to meet your monthly home loan obligation.
Your total monthly debt payments also play a critical role in home affordability. The bottom line is the more monthly debt Veterans carry, the harder it is for them to pay their bills comfortably.
Your debt-to-income ratio (DTI) will help you understand more about your total monthly debt and home affordability, which we’ll cover in more detail later.
VA-backed mortgages have no minimum credit score requirement. However, with a lower credit score, you’ll pay a higher interest rate and more fees that could increase your monthly mortgage payment.
Lenders use your credit score to evaluate your level of financial responsibility. The more financially responsible you are, the more likely you are to make your mortgage payments on time.
If you have less-than-perfect credit, lenders might consider you a riskier borrower and charge you more for a home loan.
Why Your DTI Is Important for Affordability
Your debt-to-income ratio is the relationship between your income and how much you spend each month on debt. For example, if your total monthly debt is $720 and your monthly income is $2,000, your DTI would be 36 percent.
You determine your DTI by dividing your total monthly debt by your total gross income.
Here is a quick example of how lenders calculate your DTI
Total monthly debt (rent + car payment + credit card payment + student loan payment) / Gross monthly income = Debt-to-income ratio ($1,200 total debt / $4,500 gross income = 0.26 or 26 percent).
Keep in mind most VA lenders only use active consumer debts that show up on your credit report to calculate your total monthly debt. In almost every case, VA-backed lenders won’t use debt such as your cellphone bill, car insurance, health insurance premiums or utility bills to calculate your DTI.
The VA recommends that lenders cap your DTI at 41 percent. However, the VA doesn’t provide the actual financing, so it's up to lenders to use their own ratios to make loans.
If your DTI exceeds 41 percent, you may pay a higher interest rate or pay more fees. By paying more than 41 percent of your gross income on monthly debt, a slight downward shift in your pay could severely damage your long-term housing budget.
Difference Between Front-End and Back-End DTI
You may have heard of the terms front-end and back-end debt-to-income ratios. But, you might not know the difference between the two and how they impact your DTI calculation.
Your front-end DTI is your housing expenses, like your monthly payment, property taxes and home insurance divided by your income.
Although lenders don’t use this ratio to qualify you, it’s still essential in helping you figure out how much house you can afford.
A general rule of thumb is your front-end DTI shouldn’t exceed 28-30 percent. Although this rule isn’t set in stone, it’s a good benchmark to help you calculate your VA home loan affordability.
Your back-end DTI ratio calculates how much of your gross income goes towards other types of debt such as credit cards, student loans and car loans. A back-end ratio under 36 percent is generally preferred, but this can vary depending on the lender.
Why Get Preapproved for Your VA Home Loan
Whether you’re considering a VA loan, conventional mortgage, USDA loan or an FHA loan, getting preapproved is a big milestone in your homebuying journey.
A VA loan preapproval is a lender telling you how much financing you qualify for. In the housing market, a preapproval shows agents and sellers you have serious purchasing power. Obtaining your VA loan preapproval before house-hunting can also give you a better idea of what kinds of houses you can afford.
To get a VA loan preapproval, you’ll need to provide lenders with documentation of your employment history, military service, and other vital information to determine your eligibility. Lenders will then ask for your permission to pull your credit score.
If your credit score meets the lender’s standards, you’ll then provide proof of income or other pertinent documents depending on your current financial situation. Documents might include bank statements, W-2s, disability award letters and more.
If all the information you provide the lender checks out, you will receive a preapproval letter from the lender.