“I want to use a VA loan to buy a home in Washington State. How much can I afford to borrow?”
This is a common question among military members and veterans who use the VA loan program to purchase homes. Here’s what you need to know about it.
Debt Ratios and Residual Income Requirements
The debt-to-income (DTI) ratio is one way mortgage lenders determine how much of a VA loan you can qualify for — or any kind of mortgage loan, for that matter. This ratio compares the amount of money you earn to the amount you spend on your recurring monthly debts. It’s generally expressed as a percentage.
For instance, a DTI ratio of 33% shows that about one-third of my income goes toward my debts.
As a general rule, the Department of Veterans Affairs uses a benchmark of 41% for the maximum debt-to-income ratio on VA loans. So anything above that might bring some additional scrutiny. But there are exceptions to this. In some cases, borrowers can have DTI ratios above that level, if they meet certain income requirements.
“Residual income” is the household income you have left each month, after paying all of your credit accounts (mortgage payments, credit card bills, car payment, etc.). Washington VA loan borrowers with residual income that is 20% higher than the minimum requirement are often given extra leeway when it comes to their debt ratios.
But we’re getting into the weeds here. If you would like to know how much you can afford to borrow when using a VA loan in Washington, please contact us. We can review your financial situation to determine if you’re a good candidate for a VA-guaranteed mortgage loan. We can also tell you how much house you might be able to afford, based on your income and other factors.
Getting Pre-Approved to Buy a Home in Washington
If you’re planning to use a VA loan to buy a home in Washington State, it would be wise to get pre-approved before entering the real estate market. This is a good way to figure out how much house you can afford to buy with a VA mortgage loan.
You can think of pre-approval as a kind of pre-screening process. Your mortgage lender will review various aspects of your financial situation, including your current income, debts and assets. They’ll also check your credit to see how you’ve borrowed and repaid money in the past.
The goal here is two-fold:
- to find out if you’re a good candidate for a VA loan, and
- to determine the size of loan you’re qualified to take on.
It makes sense to do this on the front end of the home shopping process. That’s why it’s called “pre” approval. This process gives you a better sense of how much house you can afford to buy in Washington, when using a VA loan. With a specific price range in mind, you can narrow your home search to the kinds of properties you can afford to purchase. That makes you a more efficient home buyer, and increases your chance for success.
Self-Budgeting: How Much Can I Afford When Using a VA Loan?
It’s also wise to do a bit of budget math for yourself, to determine how much you might be able to spend on your monthly housing costs. Fortunately, the math is pretty straightforward.
To determine how much you can afford to buy with a VA loan, start by looking at your net monthly income and your recurring monthly expenses. These are the two fundamental components you need to get a basic housing budget on paper.
Step 1: Add up your total monthly expenses and debt payments (excluding your housing costs). Depending on your financial situation, this might include credit cards, car payments, student loans, savings account contributions, gas, groceries and more. These are your monthly non-housing expenses.
Step 2: Next, take the total from step one and subtract it from your monthly net income. This is your take-home pay, after taxes. You’re trying to figure out how much money you have left over each month, after paying all of your non-housing debts and expenses.
Step 3: The number remaining is the most you could spend on your housing payments. But you probably don’t want to use this entire remainder — that would leave you without an emergency fund. Many financial experts recommend keeping enough money in the bank to cover three to six months worth of living expenses. So you’ll want to work down from the remainder identified in step two, to determine how much you can spend on housing costs.