How Do Mortgage Lenders in California Decide How Much to Lend?

“I’m applying for a mortgage loan in California and want to know how much I can borrow. How do California banks and mortgage lenders decide how much to lend? Is it all just based on income?”

These are some of the most common questions among home buyers in the Golden State, and rightfully so. After all, you can’t conduct an efficient home search until you know how much you can borrow. So, how do lenders determine this?

How Mortgage Lenders Decide How Much to Lend

Lenders use a variety of factors when determining how much to lend. For instance, your monthly income and recurring debts play an important role. Credit scores and down payments also come into the picture, along with government-imposed loan limits. So let’s talk about each of these factors in turn.

Lenders Use Debt Ratios to Decide How Much to Lend

When it comes to approving individual borrowers, California banks and mortgage lenders often use the debt-to-income ratio (DTI) to decide how much to lend. They look at the amount of money you earn each month, in relation to your recurring debts.

The math is fairly simple. To calculate your DTI ratio, you would simply add up all of your monthly debt payments and divide them by your gross monthly income. Based on this calculation, the lender would determine how much they are willing to lend you.

These days, many mortgage programs limit the total DTI (including mortgage payments) somewhere in the low to mid 40% range. So if a borrower’s combined debts exceed 45%, they might have a harder time getting approved for a loan.

The goal here is to ensure that the borrower has a manageable level of debt, and to help prevent affordability problems down the road.

But these numbers are not always set in stone. In some cases, a borrower might be allowed to have a slightly higher debt ratio, if they are well qualified in other areas. The best way to find out where you stand it to speak to a mortgage lender. So feel free to contact us!

Loan Limits Vary by County

Both FHA and conventional mortgages have loan limits associated with them. As you might have guessed, they limit the size of the loans that are available to borrowers. So this too could affect the maximum amount you’re able to borrow.

For instance, a “conforming” home loan is one that conforms to the size limits used by Freddie Mac and Fannie Mae. As of 2022, the maximum conforming loan limit for the San Francisco Bay Area was set at $970,800. So anything above that would be considered a “jumbo loan” and might require a larger down payment and higher credit scores.

FHA loans also have limits, and they also vary by county.

To be clear: Borrowers with sufficient income and good credit can often borrow more than these limits, by using a so-called jumbo loan. But these limits do affect a lot of borrowers, and they’re partly how mortgage lenders decide how much to lend.

Credit Scores and Down Payments

Credit scores can play a role here as well. Your credit score is a three-digit number that shows how you have borrowed and repaid money in the past.

In a nutshell: a higher score shows that you have managed your debts well in the past. In contrast, a lower score indicates a higher risk to the lender. Borrowers with good credit tend to have an easier time qualifying for mortgage loans, and sometimes get lower rates as well.

The same is true for down payments. A larger down payment could help you qualify for a larger loan size, with all other things being equal.

All of these factors combined help California mortgage lenders determine how much to lend, on an individual basis.

Ready to Explore Your Mortgage Options?

Bridgepoint Funding is located in the Bay Area, but we serve the entire state of California. As a mortgage broker, we can offer access to a wide range of home loan options, including some with flexible requirements and low down payments.

Do you have questions about the mortgage process? Want to get pre-approved so you can start the house-hunting process? Contact our staff to get started. We look forward to helping you!