“Debt-to-income ratio” is one phrase a newcomer to home loans hears a lot of when applying for a VA home loan. Before analyzing this ratio becomes an important part of a borrower’s financial planning, how the ratio is arrived at can be a bit of a mystery. It’s one thing for a borrower to sit down and study the bills and the pay stubs to see how much is left over at the end of the month–but how does the lender do it for the purposes of approving a VA home loan?

The lender’s goal in studying the borrower’s debt-to-income ratio is to identify verifiable income–money earned in a reliable, predictable way, and compare those predictable earnings with the known monthly expenses. The VA goes so far as to describe what expenses it wants to measure;

• mortgage payment
• other shelter expenses (utilities, etc)
• debts and obligations such as credit card bills, student loans, etc
• family living expenses

The borrower’s income sometimes isn’t enough to justify the loan if the debt to income ratio is too high. Borrowers with more than 41% of their income going towards debts and expenses may have trouble qualifying for a loan but the lender does have some flexibility with the amounts depending on the circumstances. Some borrowers have a spouse or co-borrower on the loan to make the application more attractive. Co-borrowers credit history and debt to income ratios are also taken into consideration.

In a case where the borrower wants to have a “civilian” co-borrower, someone not a spouse or qualified to get a VA loan themselves, the veteran borrower must have the majority of responsibility for the mortgage. A veteran borrower can’t be the “40″ in a 60/40 arrangement for VA loan obligation with a non-VA co-borrower.

In situations where the borrower wants to include a spouse’s income into the verifiable income column, lenders are forbidden from asking about spouse income unless either the spouse is contractually obligated on the loan or the home to be purchased is in a “community property” state.

Regardless of spouse income or co-borrower participation, the best way to handle the debt-to-income ratio is to begin reducing the amount of personal debt before applying for a VA home loan. Those who spend at least a year working on credit card debt and other financial obligations will have a better experience when calculating the ratio ”for real” during the VA loan application process.