Guide to Calculating Affordability for a VA Loan

Eligibility for a VA Loan

To get approval for VA loans, borrowers need to pay attention to several eligibility requirements from the Department of Veterans Affairs (VA) and the lender and have a valid certificate of Eligibility (COE).

To obtain a VA loan, you need to meet at least one of the following criteria:

• You serviced 181 days of active service during peacetime;
• You served 90 consecutive days on active service during wartime; 
• You served 6 years in the National Guard or Reserves or have 90 days of service (at least 30 of them consecutively) under Title 32 orders; 
• You are the spouse of a service member who died while serving or because of a service-related disability.

Income Requirements for a VA Loan

VA loan income requirements are one of the most critical factors affecting borrowers’ affordability for VA loans. When applying for extra funds, lenders want to ensure you can make your monthly mortgage payment on time. They pay attention to your gross income – the total amount you get before deductions – to calculate your debt-to-income ratio (DTI).

Lenders check your residual income, which means the amount left over from your paycheck after the mortgage payment, property taxes, homeowners insurance, state and federal withholdings, and debt obligations taken from your gross monthly income.

Factors Affecting VA Loan Affordability

Your VA loan affordability depends on several factors, showing the lender whether you can make your monthly mortgage payments on time. The Department of Veterans Affairs (VA) is not a lender and does not provide loans. Instead, it cooperates with numerous VA lenders that will provide you with the necessary loan amount. Every VA lender has its own requirements, and you need to compare them to find an option with the most favorable loan term and the lowest estimated interest rate. However, regardless of the lender, all VA borrowers need to pay attention to the following factors to determine whether they can afford a VA loan.

Credit Score

A credit score is a three-digit number that lenders use to decide whether to approve your loan, credit card, or other request. It contains information about your credit history and shows your creditworthiness to loan providers. A good credit score proves you can make your mortgage monthly payment on time and helps you get a maximum loan amount. 

Credit scores impact your interest rates. The higher your credit, the lower your interest rates. A good credit history can help you get smaller monthly payments for a loan. 

Although VA loans don’t have minimum credit score requirements, good credit increases the amount of home you can afford, as the lenders will be more likely to approve your VA loan request on a large sum.

Monthly Debt Payments

Your monthly debt payments play an essential role in your home’s affordability. Lenders pay attention to your major monthly debts, primarily on budget breakdown debts. The lower your total monthly debt payments, the higher your approval chance for a VA loan. 

You can understand your situation with debts, including your budget-breaking debts, by calculating your debt-to-income ratio (DTI). A DTI compares your major monthly debt payments to your gross monthly income. Although getting a VA loan is simpler when your DTI is at most 41%, there are no strict requirements for obtaining the financing.

Income

No lender will approve your VA home loan request if your financial situation does not satisfy them. Many loan providers will ask you for two years of W2s, bank statements, current pay stubs, proof of self-employment, 1099s, or others to check your annual income. They may also be interested in your remaining gross monthly income. A remaining gross monthly income is the amount you have after making your major monthly debt payments, including car payments and mortgage payments. 

Financial institutions want to ensure you can make your VA loan payment with interest rates within a loan term. Therefore, they calculate your debt-to-income ratio (DTI).

How Much Mortgage Can I Afford with a VA Loan?

The amount of mortgage people can afford with a VA home loan depends on such factors as their income and monthly expenses. Most VA loans are lent if the mortgage payment (including mortgage insurance and property taxes) doesn’t exceed 28% of the borrower’s gross income. You can borrow a larger amount with a lower interest rate for a VA home loan. However, it is crucial to consider how much house you can afford. Take into account all the additional expenses, your interest rate, and a VA funding fee, and calculate your debt-to-income ratio to ensure you can repay your debt within a loan term.

How Does a VA Loan Affordability Calculator Work?

A VA loan calculator is an excellent tool for determining how much home you can afford with a VA home loan. It considers information like your income, home price and type, and borrowing history and location.  A VA affordability calculator works by providing home buyers with a specific formula that estimates their chance of getting financing based on the lender’s criteria.

How to Prepare for Buying a Home with a VA Loan?

Borrowing money is always a responsible step, especially when it comes to expensive purchases, such as a home or a car. Therefore, it is crucial to prepare for the process and understand all the steps you will take. Before applying for VA loans, it is essential to take the following steps:

Check Your Credit Report

Many lenders will want to access your credit to make a loan decision. Therefore, it is crucial to ensure your report has no mistakes and your credit score is sufficient to borrow money on favorable terms. If a lender offers an interest rate that is too high, you should consider improving your credit.

Get Help from a Trusted Loan Specialist

Using a VA mortgage calculator is often insufficient to understand how much house you can afford and what the best borrowing option for you is. As it is crucial to borrow a loan without significantly affecting your monthly net income, it may be a great decision to consult a trusted loan specialist.

Make a Down Payment

Although your VA lender will instead not require a down payment, it may be a great option. A down payment for your loan can significantly reduce your VA funding fee, monthly payment, and interest rate.

Calculate Your Debt-To-Income Ratio

Calculating your DTI can help you understand the comparison between your debt monthly payment and your gross income. It will help you to determine your potential home price to manage your mortgage payments with funding fees and other charges.

Create a Budget

Paying a funding fee, buying private mortgage insurance, and other consequences of taking a VA home loan can significantly affect your annual income. Therefore, it is crucial to determine how much house you can afford, decide on a maximum home price, and make your monthly budget breakdown depending on your loan cost. Remember to consider your other monthly expenses and money for unexpected costs.

Frequently Asked Questions (FAQs)

Can I use projected BAH for loan calculations?

Yes, you can. Basic Allowance for Housing is one of the income options for applying for a VA home loan. It is non-taxable, allowing lenders to use it to calculate your debt-to-income (DTI) ratio.

What other sources of income are considered for a VA loan?

VA lenders accept various sources of income. In addition to your salary, you can use your spouse’s salary, self-employed income, retirement income, pension, VA disability income, child support, alimony, and many other options.

How does disability compensation affect VA loan eligibility?

Disability compensation does not affect VA loan eligibility negatively. Furthermore, a Veteran with a disability rating does not have to pay a VA funding fee and can use their disability compensation as a source of income for a VA home loan.

Is there a maximum limit for VA loans?

Yes, there is. A maximum loan amount in most parts of the country is $726,000 for a single-family home. If you live in a higher-priced county, this limit can reach $1,089,300.

How does my credit score impact my interest rates?

Your credit score significantly impacts your interest rate on a VA loan. Although you can participate in the VA loan program with bad credit, it is better to work on improving your credit. The higher your credit score, the lower interest rate you can get and the more affordable your monthly mortgage payment.