For many people, having children is one of the most rewarding experiences of their lives. But it also comes with great responsibility, including financial obligations.
Did you know that your child could directly impact your VA home loan? Let’s explore how your kids may play a role in whether youre approved for or denied a VA loan.
Daycare expenses can be financially crippling for some families. For many, their monthly daycare expenses are higher than their housing costs. Mortgage companies know how much daycare can impact a familys finances.
For some families, it makes financial sense for one parent to stay at home with their children. An underwriter will view this as a valid reason for not having daycare expenses. For many other families, it makes more financial sense for both parents to work.
If you are in the second group, you must determine your monthly child care expenses and ensure your loan officer is aware of this payment when you get prequalified. Failing to provide this information at the start of the process could lead to a loan denial later on if these expenses are discovered by an underwriter.
As a parent, you know that childcare costs can take a huge bite out of your budget But is the expense of daycare or after-school care factored into your debt when applying for a mortgage or other loan? The answer is complicated Let’s take a detailed look at how childcare impacts debt calculations.
How Childcare Affects Debt-to-Income Ratio
Your debt-to-income (DTI) ratio compares your monthly debt payments to your gross monthly income. It’s a key factor lenders use to determine your ability to repay a loan. Generally, childcare isn’t included in your DTI for conventional mortgages. But there are exceptions.
VA and FHA Loans Include Childcare Costs
VA and FHA loans have more flexible DTI requirements and do factor in childcare costs. With a VA loan, if you pay for regular childcare, that amount will be counted toward your monthly debts. FHA loans take child expenses into account when calculating residual income.
So if you’re applying for a VA or FHA loan, be prepared to provide documentation of your childcare costs. This may increase your DTI ratio and impact loan eligibility.
Higher DTI May Require Loan Adjustments
If adding childcare to your DTI pushes it over the lender’s limit, you may need to make adjustments:
- Wait until childcare expenses decrease
- Pay down existing debts to lower your ratio
- Reduce the loan amount to have a smaller payment
Work closely with your loan officer to find the right solution based on your situation.
Childcare Statements Required for VA Loans
Lenders often require a Child Care Statement when applying for a VA loan. This documents your childcare expenses for any children under 12 years old.
The statement details:
- Number of children requiring childcare
- Their ages
- Your monthly childcare costs
This gives the lender greater insight into your finances. Make sure to be open and thorough when providing this documentation.
Residual Income Calculation for VA Loans
VA loans look at residual income as well as DTI. Residual income is the money left over each month after paying bills and childcare.
The VA uses tables that factor in family size and geographic region to determine required residual income levels. The bigger your family, the higher your residual income should be.
Since childcare reduces leftover income, it’s an important part of the residual income evaluation. Be ready to verify your childcare expenses so the lender can make an accurate determination.
Tips for Managing Childcare Costs
While lenders understand childcare is a necessity, covering the expense can impact your borrowing power. Here are some tips to manage costs:
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Explore government assistance programs that help with childcare costs based on income. These can reduce your out-of-pocket expenses.
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See if your employer offers Dependent Care Flexible Spending Accounts. These allow you to set aside pre-tax money to cover childcare costs.
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Claim available tax credits like the Child and Dependent Care Credit when filing your taxes. This can put money back in your pocket.
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Consider lower-cost childcare alternatives like babysitting co-ops, trade agreements with other parents, or discounted daycare centers.
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Wait to purchase until your childcare expenses decrease, like when children start kindergarten. This can improve DTI.
Child Support Impacts Debt Levels Too
Along with childcare, child support payments are factored into your debt obligations. Whether you pay or receive support, be prepared to provide documentation like court orders. Child support amounts will be included in DTI calculations.
Additional Ways Kids Impact Finances
While daycare and child support directly increase debt, children affect your finances in other ways:
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Increased housing costs – You may need a larger home for your family.
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Added healthcare expenses – Children come with lots of doctor’s appointments and insurance costs.
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Higher utility and grocery bills– More food, electricity, water usage adds up.
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Reduced retirement savings – Retirement contributions may be cut back to pay for kid costs.
Though not debt, these indirect costs impact your overall financial picture. Being aware of them can help you create realistic budgets and savings goals.
Speak to Loan Officers About Your Situation
Every family’s situation is different. Be open with loan officers about your childcare expenses and child support obligations. This allows them to make fully informed decisions regarding your lending options.
Providing documentation up front also prevents surprises down the road. Work together to find solutions that accommodate your debt while still achieving homeownership.
Key Takeaways
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Childcare costs are included in debt calculations for VA and FHA loans, potentially increasing DTI.
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Higher DTI ratios may require loan amount adjustments or waiting to purchase until costs decrease.
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VA loans require a Child Care Statement detailing expenses for under 12 year olds.
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Residual income looks at money left after bills and childcare based on family size.
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Managing costs, claiming tax benefits, and exploring lower cost care can help offset expenses.
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Inform lenders about childcare and child support to craft the best loan solutions.
As a parent, you have enough to worry about without homebuying complications. But being aware of how childcare impacts debt ratios can help you prepare financially, prevent surprises, and work with lenders to find the ideal mortgage or loan for your family. With some planning and communication, you can keep your children from derailing your dreams of homeownership.
Is Child Care Considered in DTI?
Many lenders require a written child care expense statement or letter if you have children under the age of 12. This is a document that your underwriter reviews once you have a contract on a home and outlines whether you incur daycare expenses monthly. If you state that you do not incur any daycare expenses for your child or children, then you must explain why.
Residual Income and Family Size
The VA loan has a unique requirement that sets it apart from other types of loans called residual income. The VA has established specific guidelines on how much income you must have left over for basic necessities after expenses based on your family size.
You can review this in-depth article explaining VA loan residual income guidelines . Basically, the larger your family size, the more residual income youll need to cover necessities such as food and clothing.
If you pay child support, this monthly payment will be included in your DTI ratio. If you receive child support, you should talk with your loan officer about the possibility of including this income, which could lower your DTI ratio.
Whether you pay child support or receive it, you will have to provide documentation of the amounts, usually in the form of a child support order or divorce decree. If you dont have this documentation when you complete your loan application, start working on obtaining it immediately. You dont want to delay your closing by waiting until the last minute to gather these documents.
Whether your child is 6 months or 16 years old, they come with expenses. Your loan officer should be able to talk with you about your unique situation and help you determine what you can qualify for based in part on the factors above.
Veterans United is always here to help. Reach out to a VA loan expert today at 855-259-6455 if you have any questions.
Answer a few questions below to speak with a specialist about what your military service has earned you.
About Our Editorial Process
Veterans United is recognized as the leading VA lender in the nation, unmatched in our specialization and expertise in VA loans. Our strict adherence to accuracy and the highest editorial standards guarantees our information is based on thoroughly vetted, unbiased research. Committed to excellence, we offer guidance to our nations Veterans, ensuring their homebuying experience is informed, seamless and secured with integrity.
Childcare Costs Are Out Of Control! (Here’s What You Can Do About It)
FAQ
What expenses are considered debt?
List your monthly debt payments. Make a list of every outstanding loan and the amount you must pay each month. Student loans and car loans count as debt. So do credit cards, even if you always pay the balance in full.
What is counted as debt?
Examples of revolving debt are credit cards, personal lines of credit, and home equity lines of credit (HELOC). With a HELOC you borrow against your home’s equity, with your home as collateral. All costs of handling the estate, as well as funeral and burial costs, are also considered the estate’s debts.
Is child support considered in debt-to-income ratio?
Add up your monthly bills which may include: Monthly rent or house payment. Monthly alimony or child support payments. Student, auto, and other monthly loan payments.
Does daycare count as child care expenses?
Services that may qualify as work-related expenses include nanny-share arrangements, day care, preschool, and day camp for your qualifying persons, and the care can be provided either at your home or outside your home. See IRS Publication 503, Child and Dependent Care Expenses for more information.
Are child care expenses considered a debt-to-Income (DTI) ratio?
For VA loans, child care expenses are considered in your debt-to-income (DTI) ratio if they are recurring. If your child care expense pushes your DTI ratio over the approved limits, you have a couple of options: Many lenders require a written child care expense statement or letter if you have children under the age of 12.
Does VA consider childcare expenses as debt?
If so, what documentation is required? Yes, the VA considers childcare expenses as debt. The lender must obtain a letter from the Veteran documenting the childcare expense or detailing why no expense is incurred. Ensure that the current daycare provisions will remain logical based on the location of the new home.
Are child care expenses considered a recurring liability?
Child care expenses. Child care expenses are not required to be considered as a recurring liability when calculating the total debt ratio. Student loans. Lenders must include the greater of one percent of the loan balance reflected on the credit report or the verified fixed payment due by the loan servicer.
Is child support considered a debt?
Child support is considered as a debt and must be listed in section D of the Loan Analysis Form. If late payments appear on the credit report, it should be addressed and considered in the overall credit picture. Return to top Should an underwriter use a debt against a borrower that is secured by deposited funds?
Are daycare expenses financially crippling?
Daycare expenses can be financially crippling for some families. For many, their monthly daycare expenses are higher than their housing costs. Mortgage companies know how much daycare can impact a family’s finances. For some families, it makes financial sense for one parent to stay at home with their children.
Do I need a child care expense statement?
Many lenders require a written child care expense statement or letter if you have children under the age of 12. This is a document that your underwriter reviews once you have a contract on a home and outlines whether you incur daycare expenses monthly.