High DTI Mortgage Loans in California: A Guide for Borrowers

In this article: an explanation of “high DTI” mortgage loans for California home buyers who have a high level of debt.

For many Californians, the dream of owning a home might seem out of reach due to high housing costs and strict lending requirements. One major obstacle that can prevent prospective buyers from securing a mortgage is a high debt-to-income (DTI) ratio.

But for borrowers who fall into this category, there’s still a path forward. In this article, we’ll explore high DTI mortgage loans in California, including their requirements and benefits.

The Debt-to-Income Ratio Explained

When you apply for a mortgage loan in California, the bank or lender will review your current debt situation as it relates to your income level. They do this by analyzing what’s known as the debt-to-income ratio, or DTI for short.

You actually have two of these ratios, when it comes to mortgage loans:

• A front-end debt-to-income ratio (DTI) compares a borrower’s monthly income to their monthly housing expenses. Specifically, it looks at the percentage of their income that goes towards housing-related costs such as mortgage payments, property taxes, and insurance premiums.
• A back-end DTI ratio takes into account all of a borrower’s recurring debts, including housing expenses, credit card payments, car loans, and student loans, among others. This metric provides a more comprehensive picture of a borrower’s financial health, as well as their ability to manage their debt obligations.

Many mortgage lenders in California have strict limits regarding the backend debt ratio, often capping it at around 43%. This means that if your total debts use up more than 43% of your monthly income, you might have trouble qualifying for a mortgage loan to buy a house.

As a mortgage broker, we have access to multiple lenders and a wide variety of home loan options. Because of this, we are able to offer high DTI mortgage loans to borrowers across California.

So let’s shift gears and talk about what that means…

The High DTI Mortgage Option

As you might have guessed, a high DTI mortgage allows borrowers with a higher-than-average debt level to qualify for a home loan. They are designed for borrowers who have a relatively high DTI ratio but still want to buy a home.

These loans may have higher interest rates, or require a larger down payment. But they allow borrowers to qualify for financing even if their DTI ratio is above the usual limits. It provides a path forward for those borrowers who might have encountered roadblocks in the past.

We are able to offer high DTI mortgage loans for borrowers with a back-end debt ratio as high as 57% for the FHA program, and up to 50% for conventional loans. Borrowers seeking a VA loan could have an even higher debt ratio, as explained in this related article.

In many cases, borrowers can also use financial assets as income, to help bring down the DTI ratio. That’s not always necessary, but you should at least know it’s an option. Additionally, bonuses, overtime and commissions can be counted toward overall income in many cases.

Also, installment debt that includes fewer than 10 payments can be excluded from the DTI ratio calculation on a conventional mortgage loan. This is another way to reduce the debt-to-income ratio for otherwise well-qualified borrowers.

It’s the Ability to Repay That Matters Most

Debt-to-income ratios can be a useful tool for banks and mortgage lenders in California. They give lenders a way to evaluate a borrower’s current debt load, in relation to their income.

This in turn can help prevent a situation where somebody takes on too much debt with the addition of a home loan. So you can think of the DTI ratio as both a risk-assessment and risk-avoidance tool.

But it’s only one piece of a bigger picture.

The most important thing, from a mortgage lending perspective, is that the borrower has the financial capacity to repay the mortgage debt and manage their monthly payments. And there are many people out there with a relatively high debt ratio who are still in a good position to take on a home loan.

And that’s where the high DTI mortgage option comes into the picture. It allows people who are otherwise well-qualified for a loan to clear the underwriting process and reach the final mortgage approval and funding.

Let’s Explore Your Financing Options

As you can see, borrowers in California have a lot of options when it comes to mortgage financing. But a lot of people don’t even realize all of these options exist. And how could you, unless you actually work in the industry?

This is why it’s so important to work with a knowledgeable mortgage professional who can offer a wide range of loan options.

Bridgepoint Funding has been helping California home buyers and homeowners for going on 20 years. We can review your current financial situation – including your debts, income and assets – to identify the best mortgage loan option for you.