By Mandy Rebmann

As covered in an earlier piece, one of the major factors used in qualifying for a VA loan is your Debt-to-Income (DTI). Generally, the DTI you will need to qualify for a VA loan is 41 percent or less. But how does your lender determine what your DTI actually is? The debt part is the total monthly debts found on a credit report. But the number determined as your monthly income can seem like a complicated conclusion. 

People rely on many types of income, and for loan purposes, not only is the amount important, but also the probability you will keep earning the income at roughly the same amounts. And it’s up to you and your lender to verify and document this.

The following are among the types of income that may be considered: base pay, incentive and allowance pay, wages and salary, self-employment, tips, commissions and rental income. Additionally, income sources such as disability payments and public assistance can be included. Income derived from child support, alimony, or separate maintenance may be volunteered to help qualify, but is not required to be divulged. Regardless of what type of income it is, the amount and probability of continuation needs to be documented. 

• Duty, incentive, and allowance pay is verified by a Leaving and Earnings Statement (LES). The LES verifies amounts paid and frequency. An underwriter will also check the expiration date for active duty service for enlisted service members and members of the National Guard or Reserve. 
• Special consideration is needed if you are close to ending your enlistment period, or if you are part-time and will be coming off active duty. Your higher active duty or hazard pay may still be considered in some circumstances, or may be used to offset short-term debt. 
• If you were injured while serving on active duty, and receive disability payments from the VA, they may be used as income. The key, like all income used to qualify for a mortgage, is it needs to be documented it will continue. Documentation required for disability payments generally includes proof of receipt (checks or direct deposit) and the award letter ensuring continuation.
• If you receive any non-taxable income, it may be “grossed-up” to 125 percent. For example, if you receive $100 non-taxed income each month, it may be grossed-up to $125 for DTI purposes.  This allows non-taxable income to be counted more accurately.
• Generally, for non-military sources of income, a two-year history needs to be established to justify current amounts and reasonable belief it will continue. There are general guidelines for all types of income. For example, wage income will require paystubs and a VA Form 26-8497, Request for Verification of Employment. Self-employment income may require two years of income tax returns, plus a current year-to-date profit and loss statement.
• Income contributed by a spouse follows the same rules. However, it is not required a spouse disclose their income in the loan process unless that spouse will be named as a co-borrower on the loan, or if the applicant is relying on the spouse’s income to qualify for the loan.

In addition to verifying income to satisfy DTI requirements, VA loans require the borrower/s    demonstrate Residual Income - an amount determined by household size and location that is left over after your monthly housing payment and debts are paid.

It is a good idea to gather much of this information before you apply so you’ll have it handy when your lender asks for it. And, depending on how long your loan takes to close, be prepared to have to provide updated documents. Like milk and frequent flyer miles, they expire.