Are you anticipating applying for a VA home loan and need to know how to lower debt-to-income ratio? This is an important topic because your debt-to-income ratio affects the kind of mortgage you will qualify for as a first time home buyer.
What is the Debt-to-Income Ratio?
Your debt-to-income ratio is a percentage, a number that compares a buyer’s recurring expenses and debt payments to their gross monthly income, the amount of money earned each month before taxes and payroll deductions. A Debt-to-income ratio is a metric that gives lenders a clear idea if you will be able to afford future mortgage payments. Lenders will perceive you as a risky borrower if your debt-to-income ratio is high, although a higher credit score will counterbalance some of that perceived risk because you have a demonstrated history of making on-time payments.
Debt-to-income ratio is calculated by dividing monthly debt payments by monthly gross income. You will want to know that there are two forms of the debt-to-income ratio: a “front-end” ratio and a “back-end” ratio.” The front-end ratio only compares housing and mortgage expenses to gross income. Lenders of conventional mortgage loans use the front-end ratio. But if you are a Veteran and plan to use your VA home loan benefits, only your back-end ratio will be considered.
The back-end ratio measures the amount of your gross income that goes toward all major existing debt, including credit card payments, loans, child support, alimony, car payments, etc. Housing expenses are also factored in. In short, we can see that the back-end ratio is a more inclusive metric and provides a more comprehensive view of a person’s finances.
By now, it should be clear how important it is to make every reasonable effort to lower your debt-to-income ratio before applying for a home loan. A lower debt-to-income ratio will make you better positioned to get approved for a mortgage. If you need to lower your debt-to-income ratio, there are a number of strategies you can implement before applying for a home loan.
How to Lower Debt-to-Income Ratio?
You can lower your debt-to-income ratio in two ways:
- Decrease your debt.
- Increase your income
Increase your income by changing jobs, renegotiating your current salary, or securing a side job. A side job can be a temporary situation until the bulk of your debt is gone, and your debt-to-income ratio is lowered. If increasing your income is not feasible, there are numerous ways to decrease your debt.
Determine your Expenses
Examine the actual state of your finances. How much do you earn and what are your monthly expenses. Don’t leave anything out because even seemingly small expenses add up. Once you determine how you tend to spend your income each month, categorize your expenses into two lists that distinguish between needs and wants. “Needs” are those purchases and services that you cannot live without in order to survive. This “needs list” includes housing, food, utilities, gas for your car, health insurance, etc. The “wants” might be nice, but they’re extra and optional.
Create a Budget
As a next step, you want to create a budget that prioritizes necessary expenses and paying down debt. This budget avoids unnecessary purchases until you have lowered your debt as you are preparing to invest in a new home.
When preparing a budget that prioritizes paying down your debt, see if it is possible to pay off loans and credit card balances ahead of schedule instead of sticking with the current monthly installment plan. Those extra payments will make an impact in the long run, allowing you to lower your overall debt more quickly and getting you closer to your financial goal.
Continuously Watch your Spending
Track your spending on a weekly basis in order to hold yourself accountable. The importance of tracking your spending cannot be stressed enough. It’s best to study your spending on a weekly basis. But don’t let a month go by without checking your spending, to see if you are actually staying within your budget and overall plan to lower debt.
Avoid taking on more debt when trying to improve your debt-to-income ratio. Applying for new loans or lines of credit, even making large purchases, will only work against your larger goal and set you behind. Try to reduce the amount of money you charge on your credit cards. But don’t rule out balance transfers since they can be a way to make debt “more affordable,” if you can do a balance transfer with lower interest rates.
Lower your Interest Rates
Making debt “more affordable” is possible if you can lower the rates of high-interest credit cards. If you have a history of making payments on time and your account is in good standing, it doesn’t hurt to call the credit card company to ask about getting a lower interest rate. Alternatively, start shopping for other credit card companies to roll over the balance to achieve better terms. Finally, it’s not a bad idea to look into refinancing debt with a new lender who is able to give you a lower interest rate than your current lender.
A VA Home Loan is the Way to Go!
We want to emphasize that VA home loans are much easier to qualify for than conventional loans, even if your debt-to-income ratio is somewhat on the high end. Don’t dismiss the possibility of getting a VA home loan if you’re still working on lowering that number. If you are worried about your financial history or credit score, you will be relieved to know that the criteria to qualify for a VA home loan is very flexible compared to conventional home loans.
There are several benefits of using a VA home loan! The signature feature of a VA home loan, what they are most known for, is that a down payment is not required as long as the purchase price of your new home is within loan limits. On top of that, mortgage insurance is also not required. It’s important to know that VA home loan benefits do not expire, and they can be used more than once. So even if you earned those benefits a long time ago or used them once before, they are still yours to use again and again!
Are you ready to move forward with using your VA home loan benefits? Veterans can use their VA home loan benefits in a couple of different ways. Beyond purchasing a home, VA home loans can be used to refinance existing mortgages, make home improvements, and even construct a brand new home from the ground up! We invite you to learn more about how one of our unique and powerful home purchase programs can make buying your first house a done deal!
Our flagship program is the Dreamweaver Home Purchase Process. We also offer a 100% VA Construction Loan. This program is appealing because you get to build your house from the ground up. Our Veteran’s Angels Program offers an advantage for VA homebuyers by utilizing a set of tested techniques to improve the likelihood of getting your offer accepted. It’s no wonder that this program is our most popular one with clients, especially given its success rate!
In the meantime, check out our listing of VA approved homes for sale in California! Our blog has really useful information about VA loans and how to apply for a mortgage. We would love to talk with you about how to lower debt-to-income ratio, and about getting qualified to purchase your first home! Call our phone number (949) 268-7742 to schedule a time to talk!