f. Item 45, Debt-to-Income Ratio

VA’s debt-to-income ratio is a ratio of total monthly debt payments (housing expense, installment debts, and so on) to gross monthly income.

Add:  Items 15 + 16 + 17 + 18 +21 +41 = Debt

Add:  Items 32 + 39* = Income

Divide:  Debt ¸ Income = Debt-to-Income Ratio

Round:  To the nearest 2 digits

The “Debt-to-Income Ratio” heading in section 10 of this chapter contains special procedures to apply if the ratio exceeds 41%.

*Tax-free income may be “grossed up” for purposes of calculating the debt-to-income ratio only (not residual income).  This is a tool that may be used to lower the debt ratio for veterans who clearly qualify for the loan.  “Grossing up” involves adjusting the income upward to a pre-tax or gross income amount which, after deducting state and Federal income taxes, equals the tax-exempt income.  Use current income tax withholding tables to determine an amount which can be prudently employed to adjust the borrower’s actual income.  Do not add non-taxable income to taxable income before “grossing up.”

Tax-free income includes certain military allowances, child support payments, workers’ compensation benefits, disability retirement payments and certain types of public assistance payments.  Verify that the income is indeed tax-free before “grossing up.” 

If “grossing up” is used, indicate such and provide the “grossed up” ratio in item 48, “Remarks.”

g. Item 46, Past Credit Record

Indicate whether the applicant (and spouse, if applicable) is a satisfactory or unsatisfactory credit risk based on a complete analysis of credit data.