If you served our country in the armed forces, we thank you. It has come to our attention that many of you may not have been given guidance on your veteran benefits, or maybe you were a little too exhausted in basic training to fully grasp what they were saying. Either way, we want to help you understand one of the most commonly misunderstood aspects to the VA home loan.
There’s a big difference between being eligible for a loan amount, and qualifying for a particular loan amount. To understand this you need to know that there is Veterans Affairs (VA) and then there are banks. Each organization has different roles and responsibilities in the loan process.
To get started, each Veteran needs to obtain a Certificate of Eligibility (COE) to show that VA will guarantee their loan. On that certificate, it says that the Veteran is eligible for up to $417,000 with no money down. This is the first place that catches many Veterans off guard. That $417,000 is not how much you automatically get because you served, it’s how much you can get because you served. This is where the bank steps in because the COE is stating the max loan amount that VA will guarantee, not how much they will lend.
Now it’s time to determine how much you qualify for. This amount is determined by standards set up by VA and implemented by a bank. The bank may also have additional guidelines called overlays. Using all these standards, the bank will ultimately be the one giving you the money, which means they determine how much you should receive, or in other words, how much you qualify for.
All these standards and overlays can get a bit confusing. Let’s simplify everything by briefly explaining two of the most important standards.
A debt-to-income (DTI) ratio takes certain monthly bills and debts and divides them by your monthly gross income. For example, if the sum of your monthly obligations is $1200 and your monthly gross income is $3500, then your DTI is 34 percent. The lower your DTI the better, and the VA generally limits your DTI to 41 percent.
The other standard is one unique to the VA home loan; it’s called Residual Income. Residual Income takes a more indepth look at your obligations and income. It uses those figures to come up with a guide to show how much money you should have leftover for common expenses like groceries. It’s just another way to determine whether you qualify for the loan.
Determining eligibility is relatively easy, it just takes a little bit of paper work and sending it to VA. Getting qualified can take a little longer, and will require working closely with a loan officer. But the reward of owning a home for you and your family to enjoy is well worth it.