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VA Home Loan Qualification Factors

Guide to VA Home Loan Qualification

Military servicemembers and veterans on the path to homeownership in California may qualify for a VA home
loan if their debt-to-income ratio (DTI) conforms to VA and lender standards. The debt-to-income ratio is a significant element of your financial ability to pay for a mortgage. However, it’s only one of a handful of qualifications VA home loan lenders in California check when considering your application.

What is your debt-to-income ratio?

Quite simply, a borrower’s DTI ratio calculates the borrower’s monthly debt versus his or her gross monthly income. It’s anticipated and ordinary to have some level of debt. Unlike with other kinds of mortgages, to VA home loan lenders, only one type of DTI ratio is important. This ratio includes your monthly debts such as housing costs, recurring debts and other outstanding payments.

As noted, conventional, FHA and USDA home loan lenders use two DTI ratios for borrowers. One only considers expenses for housing. This is typically called the front-end ratio. The other ratio includes your total of all main monthly debts and is referred to as your back-end ratio. The VA pays no attention to the front-end ratio and only considers the borrowers’ back-end DTI ratios.

What’s a reasonable DTI ratio?

The VA’s standard is 41 percent, but Sierra View Financial is not bound by that standard for most loans. DTI ratios are a reliable gauge of financial stability. But don’t worry if your DTI exceeds the 41 percent limit. A higher DTI will not automatically disqualify you for a VA home loan in California, although it will require you to have additional residual income, which is another one of the VA requirements. Other components of your financial history may influence the lenders’ final decision. That’s why it’s important to also watch and maintain a good credit score.

How do you calculate back-end DTI ratios?

To calculate your back-end DTI ratio, simply divide your major monthly debts by your gross, or pre-taxed, monthly income.

Here is an example:
You earn a $72,000 salary per year. Divide $72,000 by 12 to calculate your gross monthly income: $6,000.

If your debts include an auto loan payment of $400 payment, $1000 on your new home loan and $520 on other debts such as credit cards, then your total month debt payments equal $1,920.

Divide the $1,920 in debts by the $6,000 gross monthly income for a back-end DTI ratio of 32 percent.

The DTI offers an indication at a borrower’s probable ability to take on a VA loan. A higher DTI ratio may be a sign to VA loan lenders that a borrower should implement more financial control. However, not all income is treated the same.

What type of income and debts do VA home loan lenders use to calculate DTI ratios?

This is a list of typical types of income and debt:

Types of pre-taxed income

  • Earned income such as tips, commissions, overtime and, bonuses
  • Rental property income
  • Residual income from investments

Types of debt

  • Mortgage payments (current and new)
  • Auto payments
  • Credit card minimum payments
  • Student loan payments
  • Co-signed credit arrangements
When calculating your debt totals, you do not typically include insurance, utility or general household expenses.

Take note that not all forms of income can be considered either. For example, GI Bill income for housing is not counted. Some forms of income such as commissions and self-employment earnings may require proof of two years of history.

So if my DTI ratio is higher than 41% can I still qualify for a VA loan?

Yes, it’s possible. Since Sierra View Financial considers your DTI ratio plus your credit history and credit score, your income history and other factors too. W don’t just look at your DTI ratio alone. We will make a decision based on your overall financial situation.

Another option for borrowers with a high DTI is to consider lowering your potential VA home loan amount. Our VA Loan specialists can offer suggestions to help adjust your DTI ratio to a reasonable level.

Start by taking control of your DTI ratio through debt management and smart spending and talk to one of our VA home loan specialists to walk you through the process.

Call a VA Home Loan Specialist at
(916) 989-6222

Start the VA Loan Process

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Call a VA Home Loan Specialist at
(916) 989-6222