California VA Loans Allow for a Higher Debt-to-Income (DTI) Ratio

• Mortgage lenders review the debt-to-income ratio for loan applicants.
• The “DTI” compares a person’s monthly income to their recurring debts.
• In general, California VA loans allow borrowers to have a higher debt ratio.
• We specialize in offering VA loans and can answer any questions you have.

When you apply for a mortgage loan in California, the bank or lender will review your debt-to-income ratio, or DTI. This is a comparison between the amount of money you earn and the amount you spend on your recurring monthly debts.

Different loan programs have different limits and requirements, when it comes to debt ratios. The VA loan program, which is available for California military members and veterans, is one of the most flexible mortgage programs. California VA loans typically allow for a higher debt-to-income ratio, when compared to conventional financing.

In this article, we will explain what the DTI ratio is, how it affects you as a borrower, and the benefits of using a VA loan to buy a house in California.

Difference Between VA and Conventional Mortgages

Before we get to the differences in debt-to-income ratios, let’s take a moment to review the difference between VA loans and their conventional counterparts. The rest of this article will make a lot more sense once you understand this distinction.

• Conventional loan: This is basically a “regular” home loan that does not receive any kind of government insurance for guaranteed.
• VA loan: These mortgage loans are available to most military members and veterans, and in some cases surviving spouses. VA loans are partially guaranteed by the government, through the Department of Veterans Affairs. Because of this, they offer more flexible qualification criteria when compared to conventional financing.

The Debt-to-income Ratio Explained

As mentioned earlier, the debt-to-income ratio compares a person’s combined recurring debts to their gross monthly income. Mortgage lenders use the DTI ratio when qualifying loan applicants. Here’s a hypothetical example of a DTI ratio:

A borrower has a monthly income of $5,000 and the following monthly debts.

• Car loan payment: $300
• Credit card payment: $200
• Student loan payment: $500
• Monthly mortgage payment: $1,500
• Total monthly debts: $2,500

To calculate the debt-to-income ratio in this scenario, we can add up the borrower’s monthly debts and divide that number by their monthly income. Then we would multiply by 100 to get a percentage, as shown below:

• Debt-to-income ratio = ($2,500 / $5,000) x 100
• Debt-to-income ratio = 50%

In this example, the borrower’s debt-to-income ratio is 50%. This means that 50% of their monthly income is being used to pay off debts, including their mortgage payment.

DTI ratios help banks and mortgage lenders determine a person’s ability to manage their existing debt load, while also repaying a home loan.

Generally speaking, a higher debt ratio indicates a higher level of risk for the lender making the loan. Because of this, a higher DTI can also make it harder to qualify for mortgage financing — especially when it comes to conventional loans.

VA Loans Allow for a Higher DTI Ratio

We talked about the fact that VA loans receive government backing. The federal government offers lenders a guarantee that provides added protection in cases of borrower default.

This added protection also allows lenders to be more flexible, when it comes to VA mortgage loan requirements. And that applies to the borrower’s debt-to-income ratio as well.

Generally speaking, VA loans in California allow for a higher debt-to-income ratio than conventional or regular financing. Sometimes a lot higher.

As a California mortgage company that specializes in VA loans, we regularly work with borrowers with a higher-than-average debt ratio. In fact, we recently closed a loan on a $3 million home purchase for a borrower with a 70% debt-to-income ratio. That type of borrower typically wouldn’t qualify for conventional financing.

The Ability to Repay the Loan

When it comes to approving home loans, the borrower’s ability to repay the debt is what matters most. So even if a borrower has a relatively high DTI ratio, they might still be a good candidate for mortgage loan — as long as they can manage their recurring debts.

Sometimes, mortgage lenders will also consider residual income when making lending decisions. This applies to both conventional and VA home loans. In this context, “residual income” refers to money that’s left over each month, after all recurring debts have been paid.

The point is, a home buyer in California with a relatively high debt-to-income ratio could still qualify for a VA loan, due to the unique nature of this program.

Other Benefits Offered by VA Loans

As mentioned above, VA-guaranteed home loans typically allow for a higher debt-to-income ratio, when compared to conventional financing. But that’s not the only benefit offered by this program.

Eligible borrowers in California can also use a VA loan to purchase a house with no money down. This program allows buyers to finance up to 100% of the purchase price, with no upfront investment needed.

Borrowers who use a VA loan can also avoid paying mortgage insurance. This in turn can reduce the size of your monthly payments. In contrast, a California home buyer who makes a small down payment on a conventional loan will have to pay for private mortgage insurance.

Have Questions About This Program?

Bridgepoint Funding is located in the San Francisco Bay Area but serves the entire state of California. While we offer many different types of mortgage loans, we specialize in the VA program for California borrowers.

If you have questions about program eligibility, debts and income requirements, or any other aspect of the VA loan program, please contact our staff. We can review your current situation and let you know how much you might be able to borrow.