For veterans, VA loans offer an often zero-down mortgage option that helps create a path to home ownership. But before you start looking for your dream home, there are some things to consider in order to best determine how much house you can afford with a VA loan.
How much mortgage can I afford with a VA loan? To answer this question, you must first have a better understanding of your personal finances and obligations and what they mean when it comes to qualifying for a VA loan, and how much you really can afford.
VA Loan: Overview
Before we look into how much a VA loan you can afford, let’s get a better understanding of what a VA loan is. Originally created and operated by the Department of Veterans Affairs as a way to offer troops returning from WWII a way to buy a home, a VA loan is no longer provided directly through the Department of Veterans Affairs. Instead, these loans are offered by VA-approved lenders and backed by the VA, meaning that should a borrower default, the VA reimburses the lender. Because of this risk reduction, lenders can provide the special terms associated with VA loans, such as no down payment requirement, low-interest rates, and no required private mortgage insurance.
Factors affecting VA loan affordability
When you begin the home buying process, the first step is to determine what your home loan affordability is. You don’t want to purchase your dream home only to find that you really can’t afford to make the payments. Taking a look at your financial situation, including your income and expenses, and what size home your family needs, will help you best determine what VA loan size will comfortably fit within your budget.
Here we look at the main factors that affect your VA loan affordability.
1. Annual income
One of the biggest determining factors when it comes to loan affordability is your gross income. Lenders will want to see proof of all verifiable income, such as w-2’s, pay stubs, 1099s, proof of self-employment, tax returns, and disability letters. The more income you have coming in, the more home you can usually afford.
2. Monthly expenses
Your monthly expenses are just as important as your income as they reveal what you will have available to make your mortgage payment. The more expenses you have, such as car loans or credit debt, the less you will have available for a monthly mortgage payment, and the harder it will be to make those payments comfortability.
3. Debt-to-income ratio
Your monthly income and expenses are then evaluated through your debt-to-income ratio. This looks at the relationship between how much comes in and what goes out every month. Your standard debt-to-income ratio is determined by dividing your total monthly debt by your total gross income. For example, if your total monthly income was $5,200 and your total monthly debt was $1,900, then your debt-to-income ratio would be 36%. When it comes to VA loans, most lenders cap the debt-to-income (DTI) ratio at 41%. If your DTI exceeds that number, you may still qualify but will pay a higher interest rate or additional fees.
Front-end vs Back-end DTI
When we talk about DTI, other considerations affect your complete DTI calculation. This includes what is known as front-end and back-end DTI. Front-end DTI refers to your housing expenses, such as your rental or mortgage payments, property taxes, and insurance. This amount is divided by your income and determines your front-end DTI. While this number is not used for direct loan qualification, it does help lenders determine your VA loan affordability. In general, a front-end DTI should not exceed 30%.
Back-end DTI refers to all your non-household monthly expenses, such as car loans or credit card debt. In general, lenders like to see a back-end DTI of less than 36%.
4. Disability and prior VA loan use
Disability and prior VA loan use are also something you need to consider as they can affect whether or not you will be required to pay a VA funding fee and how much it might be. If you are a disabled veteran, have a purple heart, or are a military spouse, for example, you are exempt from paying the typical funding fee of 2.3% of the loan. On the flip side, if you are not exempt and have had a previous VA loan, then you will have a higher VA funding fee, often around 3.6% of the loan. However, these fees can change if you provide a down payment of 5% or more.
5. Credit score
While the VA does not mandate a minimum credit score for a VA loan, many lenders will want to see a FICO score of at least 620 to qualify for a mortgage.
Other factors to consider
Once you determine how much, on paper, you can afford for a VA mortgage, there are some additional things to consider before you start looking for a home.
1. Ability to save
While taking out a mortgage and purchasing a home allows you to build wealth over time, you still want to have the ability to save in other ways. Will taking out a mortgage at the maximum amount you qualify for really be necessary to purchase your dream home? What happens if something goes wrong with your home and repairs are needed? Will you have the ability to save and create that emergency fund with your maximum mortgage?
2. Can vs. should
While you may qualify for a large amount based on the factors above, should you? Before taking out the largest possible loan you are eligible for, determine if you really need that much. Consider your housing needs, the costs of homes in your area, and whether it is beneficial to take out the larger loan or if something smaller will get you the dream home you want without cutting your budget tight.
3. Financial buffer
Sometimes it is better to consider taking out a smaller mortgage than you qualify for to allow yourself the ability to create a financial buffer should an emergency arise. Life happens and things change in everyone’s financial situation over time. What happens if you or your spouse lose your income? What if you have children? Allowing yourself the ability to create a financial buffer will help you better be able to navigate life’s changes.
4. VA funding fees and closing costs
As we mentioned above, VA funding fees can also impact your loan. Unless you are exempt from these fees, you can expect to pay 1.4% to 3.6% of the loan amount at closing. While these fees can be rolled into the loan and paid out over time, you must consider that the larger the mortgage loan, the larger these fees will be.
A clear financial picture helps determine affordability
When you take the time to evaluate your financial situation, you can get a clearer picture of what you can comfortably afford when it comes to a VA loan and purchasing the home of your dreams.
At Hero Home Programs, we understand how the home loan process can become overwhelming and we are here to help you navigate your home buying journey. If you have questions about VA loan affordability or would like to learn how we can help you find and secure the home of your dreams, request a consultation with us today.