Your Debt to Income Ratio Explained
What is debt to income ratio?
Debt to income ratio (sometimes referred to as DTI) is used by lenders to measure your ability to pay for your loan. Lenders look at what’s on your credit report and your monthly expenses such as car payments, credit card debt, rent or mortgage payments to determine whether or not you can handle this new loan.
What is not included when calculating your DTI?
Lenders don’t take into consideration anything that’s not on your credit report when calculating your debt to income ratio.
If your new mortgage is significantly higher than you previous one, you may be asked to provide your full expense budget to prove that you can handle the new burden of the home loan payment.
Is gross or net income used to calculate DTI?
Your DTI is calculated using your gross income instead of your net income. This means that all of your income before taxes is used for the calculation. In other words, you total income is taken into consideration vs one less taxes and other expenses which could make it more difficult to qualify for loans.
How is DTI calculated?
Your gross income is compared to your monthly obligations gathered from your credit report. The percentage in difference is then calculated to create your debt to income ratio.
For example, if your expenses are $1,000 per month and your gross income is $2,000. You have a DTI of 50% because half of your income is used for monthly expenses found on your credit report.
View our previous post titled What is Residual Income? for an easy way to calculate your DTI by yourself:
What does my debt to income ratio need to be to qualify for a VA home loan?
The VA’s requirement for a home loan approval is 40 percent. However, here at VA Loan Spot, we can accept DTI’s of 50% or even higher depending on your credit score. The higher your credit score, the more flexibility there is.
Ways to improve your debt to income ratio
Your debt-to-income ratio can be tweaked in your favor in many ways. Some are quick and easy adjustments while others are more complicated. All will help lower your DTI and allow you to more easily qualify for a VA home loan.
Pay down or pay off credit card balances
If you have credit cards that currently carry a balance, consider paying them down or paying them off entirely. This will help your DTI and also save you money in interest.
Consider paying off or refinancing your car(s)
Purchasing a new vehicle is not recommended when applying for a home loan, refinancing an existing loan can sometimes be more beneficial than it is harmful. Refinancing a car loan can get you a better interest rate and reduce your monthly commitment.
Paying off a car entirely is also a great way to make a huge impact on your DTI. You can even leverage the equity in your vehicle to get the best home loan possible.
It is recommended that you allow several months for the changes to populate on your credit report. So plan ahead and take action well before applying for a VA home loan.
Get the best rates for your homeowner’s insurance
Take a look at your homeowner’s insurance and shop around for better rates. Homeowner’s insurance is included in the DTI calculation and you can look for better insurance rates and reduce your monthly commitment.
Your debt to income ratio is one for the biggest factors, after your credit score, that determines your eligibility for a VA home loan. At VA Loan Spot, we can look at your DTI and find ways to improve it before you apply for your home loan to ensure you have the best possible chance for approval. Trust the knowledgeable home loan experts at VA Loan Spot to get you into your dream home. Give us a call today.