Tips & Special Topics
VA Loans and the Role of Income
Added November 3, 2008 | Updated November 3, 2008
VA home loan guaranty programs allow military service personnel, reservists, and veterans an opportunity to purchase a home with the help of a government-backed home loan option. Loan approval for VA-eligible borrowers is not automatic, however, and veterans must still qualify for a VA home loan according to program underwriting guidelines. One of the requirements is that the borrower or borrowers provide verification that their income, when compared to their debt payments (debt-to-income ratio), meets pre-established standards. These standards exist to protect the borrower and lender by indicating whether VA home loan applicants have the ability to make their proposed monthly mortgage payments.
Debt-to-Income Ratios in the VA Mortgage Loan Analysis
When utilizing a VA home loan program, a veteran may have a better chance of obtaining a mortgage compared with some other programs, due to the more lenient requirements, such as higher allowable debt-to-income ratios. The debt-to-income ratio requirement, also referred to as a DTI requirement, is a maximum ratio (percentage of) your overall indebtedness, compared to your monthly income. A VA home loan underwriter analyzes an applicant’s income and recurring monthly expenses to determine how much income would be available to put toward a monthly mortgage payment. A debt-to-income ratio of 41% is the standard; however, in some cases a VA borrower can qualify for even higher ratios for a VA home loan.
For example, this means for someone with a monthly income of $3,000, only $1,231 (41%) is allowed for all recurring monthly debts, including mortgage payment, installment loans and revolving credit payments. A lower debt-to-income ratio is looked upon favorably when you seek to qualify for a VA mortgage.
Verifying Your Income for Your VA Loan
Proof of income must be provided when applying for a VA home loan program. Usually, at least two years of W2’s must be provided to verify employment and income. In addition, the last 30 days worth of pay stubs are usually required as evidence of current employment.
Calculating a debt-to-income ratio on a VA loan requires special training; there are numerous exceptions and variables that can come up in an applicant’s individual situation affecting the final ratio. Overtime pay, commissions, disability income, alimony, and changes in salary or hourly pay are examples of such factors.
Applicants for VA home loans who have had multiple jobs over the last few years, or have had a period of unemployment, must state the reason for the change in jobs or the unemployment status. A disability preventing full or part time work may be the reason for employment gaps, and is not necessarily a reason for disqualification for a VA home loan.
Self-employment Verification for VA Mortgages
VA loan applicants who are self-employed are not disqualified from obtaining a VA home loan, but more documentation is required in order to verify income. Personal IRS tax returns for the previous two years must be submitted for underwriting approval, as well as all schedules accompanying the returns, including K-1, 1120, or 1120S forms.
VA Streamline Refinance
Once you have a VA loan, a refinance to a lower rate is easier, and less expensive. The streamline refinance program, also known as an interest rate reduction loan, offers the ability to refinance an existing VA loan to a lower rate without all the verification requirements of a full VA refinance. The income documentation requirements are usually waived for a VA streamline refinance. A VA streamline refinance is typically used when the objective is to simply lower the rate or term on a VA loan, and not when the primary purpose is to take cash out or consolidate debts.
