A debt to income ratio (DTI) is the primary factor in determining a borrower’s ability to repay the loan. Your DTI is your minimum monthly debt obligations (what’s included on your credit report) plus your expected housing expense, divided by your gross monthly income. You can see the formula below.
DTI = Monthly Debt Obligations + Expected Monthly Housing Expense / Gross Monthly income.
For the most common loan programs the borrower is limited to a 45% DTI. Obviously this is pretty restrictive, especially when you look at Hawaii home prices. The maximum DTI ratio for a VA is also only 41%, but there is an exception process available to help veterans who need to exceed this ratio to buy a home. The VA loan program gives a veteran the ability to qualify with a DTI that exceeds the 41% limit. If a veteran’s residual income meets the required threshold determined by the VA Department based on the household size then a veteran can qualify for something that exceeds the limit. So your question should be… what counts as residual income? Let’s take a quick look.
What is Residual Income?
Residual income, also known by many as “discretionary income,” is defined as follows:
The amount of income that an individual has after all personal debts, including the mortgage, have been paid. This calculation is usually made on a monthly basis, after the monthly bills and debts are paid. Also, when a mortgage has been paid off in its entirety, the income that individual had been putting toward the mortgage becomes residual income.
How Does DTI Relate to Residual Income?
So how does DTI relate to residual income? DTIs do take into account all the expenses that appear on a borrower’s credit report, but the residual income calculation takes it a step further. Taking into account expenses like income taxes, mandatory retirement deductions (social security, etc) and other miscellaneous home expenses (maintenance, utilities, etc), it is able to give a more realistic calculation of how much discretionary money (residual income) the veteran will actually have each month.
The VA wants to give veterans every single possibility they can that allows them to buy under the program. There is a lot of flexibility with this and other options available across the VA loan program. We can put a residual income chart example together for you, just contact us today and let’s get you on the track to owning your new home using the VA Loan Program.