Reducing Debt Could Help You Qualify for a Mortgage in California

Did you know that your current level of debt can affect your chances of qualifying for a mortgage loan in California? It’s true. In fact, reducing debt is one of the best things a home buyer in California can do to improve their chances of getting a loan.

If you’re doing a good job of managing your debt already, this article might not apply to you. But if you’re like a lot of home buyers in California, who carry a significant amount of debt, you should keep reading to learn how it affects you.

The Debt-to-Income Ratio Explained

Debt-to-income ratio (DTI) is a measure of how much of your monthly income goes towards debt payments. It is calculated by dividing your total monthly debt payments by your gross monthly income.

For example, if your monthly debt payments are $2,000 and your gross monthly income is $5,000, your DTI ratio would be 40%. In this scenario, you would be using 40% of your gross monthly income to cover all of your recurring debts.

Lenders use the DTI ratio to assess your ability to afford a mortgage payment. In general, they want to see a DTI ratio no higher than 43% – 45%. But there are exceptions to this general rule. The goal here is to ensure that the borrower has enough income left over after paying their other debts to comfortably afford their mortgage payments.

Types of Debt That Are Included

When you apply for a mortgage loan in California, the bank or lender will review all of the different types of debt you currently have. This might include the following:

• Mortgage payments: This is the most important debt to consider, as it is the largest monthly payment you will have.
• Car payments: If you have any car loans, the monthly payments will be included in your DTI ratio.
• Student loan payments: Student loan payments are another major debt that lenders will consider.
• Credit card payments: The minimum monthly payments on your credit cards will be included in your DTI ratio.
• Other loan payments: Any other installment loans you have, such as personal loans or medical debt, will also be included in your DTI ratio.

Basically, if there’s a bill that you have to pay every month, it will probably be factored into your overall DTI ratio. So all of these recurring expenses can affect your ability to qualify for a mortgage loan in California.

The Downsides of Having a Higher DTI

Here are some of the ways a higher debt-to-income ratio could affect you when applying for a home loan in California:

You could have a harder time qualifying. Mortgage lenders typically have a maximum DTI ratio that they are willing to accept. If your DTI ratio is too high, you may be denied a loan altogether.

You may have to pay a higher interest rate. Lenders sometimes charge borrowers with higher DTI ratios a higher interest rate on their mortgage loans. This is because they are considered to be a riskier borrower.

You may have less flexibility in your budget. A higher DTI ratio means that you have less money left over after paying your debts each month. This can make it difficult to save for retirement, pay for unexpected expenses, or make other financial goals.

Strategies for Reducing Your Debt Level

Reducing debt isn’t always easy. After all, there’s a reason we take on debt in the first place. We don’t always have enough money in the bank to cover all of life’s expenses.

But it’s still a worthwhile pursuit, especially if you’re planning to buy a home in California in the near future. Reducing your debt load can help you qualify for a mortgage loan, while improving your overall quality of life at the same time.

Here are some strategies for accomplish this goal:

• Make a budget and track your spending. This will help you see where your money is going and make changes to reduce your spending.
• Pay off your highest-interest debt first. This will save you the most money in the long run.
• Set up automatic payments for your debt. This will help you avoid late payments and late fees.
• Consider consolidating your debt into one loan with a lower interest rate. This can make it easier to manage your payments.
• Get help from a credit counselor if you are struggling to pay your debts. A credit counselor can help you create a debt repayment plan and negotiate with your creditors.
• Increase your income. This will give you more money to afford your debt payments.
• Live below your means. This means spending less money than you earn.
• Be patient and persistent. Reducing debt takes time and effort, but it is worth it in the long run.

Here’s the bottom line to all of this. The amount of debt you have is one of the main factors that can determine whether or not you can qualify for a mortgage loan. If your DTI ratio is currently in the mid to upper 40% range, or higher, you might benefit from pursuing a debt reduction strategy.

Have Mortgage Questions?

If you have questions about qualifying for a mortgage loan in California (including any of the topics mentioned above), please contact our staff.

Bridgepoint Funding offers a wide variety of mortgage loan options and serves borrowers all across the state of California. We can review your current debt and income situation to determine the best path toward homeownership.