b. 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.  It is a guide and, as an underwriting factor, it is secondary to the residual income.  It should not automatically trigger approval or rejection of a loan.  Instead, consider the ratio in conjunction with all other credit factors.

A ratio greater than 41% requires close scrutiny unless

·   the ratio is greater than 41% solely due to the existence of tax-free income (Put notation regarding the tax-free income in the loan file or calculate an adjusted, smaller ratio based on “grossing up” of the tax-free income.), or

·   residual income exceeds the guideline by at least 20%.

Loans Closed Automatically with Ratio Greater than 41%

Include a statement justifying the reasons for approval, signed by the underwriter’s supervisor, unless residual income exceeds the guideline by at least 20%.  The statement must

·   not be perfunctory, or

·   list the compensating factors justifying approval of the loan.

c. Credit History

A poor credit history alone is a basis for disapproving a loan.

If credit history is marginal, look to other indicators such as residual income.