Income and Debt Requirements for VA Loans in California

This article is part of a broader series that explores many different aspects of the VA home loan program, geared toward home buyers in California.

In previous articles, we have examined everything from the application process to the down payment requirements, among other topics. Today, we’ll focus on the income and debt-related requirements for California VA loans.

The goal is to make sure that the home buyer / borrower has enough money remaining after “paying the bills” each month to keep up with their daily expenses. Because that’s in everyone’s best interest.

And don’t worry if you’re unfamiliar with some of the terminology being used here. You’ll know all about it by the end of this article. More importantly, you’ll understand how these things can affect you when applying for a VA loan in California.

How VA Loans Work, in a Nutshell

Before we get to the income and debt-related requirements for California VA loans, let’s talk about how this program works. Everything that follows will make more sense once we lay some groundwork.

A VA loan is simply a mortgage loan that gets guaranteed by the U.S. Department of Veterans Affairs. Essentially, this means that the VA will pay back a portion of the loan if the borrower stops making their monthly payments for some reason.

This backing makes it easier for California military members and veterans to qualify for a mortgage loan. As we’ve written in the past, the VA loan program is one of the easiest types of mortgages to qualify for. This is true even if you’ve had credit-related problems in the past.

But it’s important to understand that the VA does not actually lend money to borrowers. When you apply for a VA loan in California, you’ll do it through a mortgage lender in the private sector—the same as other types of loans. But the VA provides a partial guarantee to give lenders an added layer of protection, as mentioned above.

With that foundation beneath us, let’s talk about debt and income requirements for VA loans in California, and how they might affect you when buying a home.

They Don’t Have Specific Income Requirements

It might surprise you to learn that the Department of Veterans Affairs does not have any official income limit or requirement for VA home loans. So anyone who meets the general requirements for the program can qualify for financing, as far as the VA is concerned.

Even so, banks and mortgage lenders do take a close look at a person’s debt and income situation when considering them for a loan. They do this to ensure the borrower has enough income to manage their monthly mortgage payments along with all of their other debt obligations—ideally with some “residual income” left over.

And that’s where the debt-to-income ratio comes into the picture.

Your debt-to-income (DTI) ratio is a percentage that compares your monthly debt payments to your gross monthly income. It’s a key factor that lenders consider when evaluating your mortgage application. This is true for FHA, VA and conventional home loans.

A lower DTI is generally better for borrowers, as it shows lenders that you have more income available to make your mortgage payments. Most lenders prefer to see a DTI of 43% or less, but some may be willing to approve borrowers with higher DTIs.

For instance, a borrower with a higher DTI who is seeking a VA loan might still qualify if they have other compensating factors. A “compensating factor” could be a high credit score or a history of managing debts effectively.

Here’s a relevant quote from VA Pamphlet 26-7, the official handbook for this program:

By law, VA may only guarantee a loan when it is possible to determine that the Veteran is a satisfactory credit risk, and has present or verified anticipated income that bears a proper relation to the anticipated terms of repayment.

There’s some convoluted government speak going on here. So let’s translate this into simple terms. The above quote means that mortgage lenders should make sure the borrower’s income is sufficient to cover the monthly mortgage payments, on top of all other recurring debts.

Focusing on the Bigger Picture

The official VA loan handbook also states that mortgage underwriters should ensure the borrower has enough income for “the mortgage payment, other shelter expenses, debts and obligations, and family living expenses.”

It advises mortgage lenders to use their judgment and allow for some flexibility when it’s warranted. In this context, “flexibility” means looking at the bigger picture of borrower qualification, instead of focusing too heavily on the debt ratio.

The point here is that California VA loans allow for some flexibility when it comes to debt and income requirements. So you shouldn’t assume that you’re unqualified for the program due to your income and/or debt situation. Contact us to find out where you stand!

Conclusion and Where to Learn More

Here’s the bottom line to all of this. While the federal government doesn’t impose specific income requirements for VA loans in California, lenders will review your financial situation to make sure you can comfortably afford the loan payments.

If you have enough income to cover all of your recurring debts (including the monthly mortgage payments), you’re probably a good for a VA home loan.

Want to learn more? Bridgepoint Funding specializes in this program and serves borrowers all across the state of California. We can answer any questions you have about VA-guaranteed mortgages and even pre-approve you for a specific loan amount.