This BLOG On High Debt To Income Ratio Home Loans In California Was UPDATED And PUBLISHED On April 30th, 2020
Debt to income ratio is what a mortgage underwriter will determine whether or not a mortgage loan applicant qualifies for a mortgage and whether they can afford to make their new payments.
Debt to income ratios are calculated by the following:
- taking the sum of the borrower’s monthly minimum debt payments
- which includes the proposed housing payment (principal, interest, taxes, insurance also known as PITI)
- and dividing it by borrower’s monthly gross income
That percentage is the debt to income ratio or DTI:
- Debt to income ratio requirements differ on FHA loans, USDA Loans, VA Loans, Conventional Loans, and Jumbo loans
- FHA Loans have the most generous debt to income ratio caps than any other mortgage loan program
- Debt to income ratio caps for the front end is 46.9% and back end debt to income ratios is at 56.9% on FHA Home Loans
- Conventional Loans have a maximum 50% debt to income ratio cap
- There is no front end DTI requirements on conventional loans
- USDA Loans is capped at 29% front end and 41% back end debt to income ratio
- VA does not have a maximum DTI requirement nor a minimum credit score require at Gustan Cho Associates
VA Loans’ debt to income ratio caps depends on the findings of the Automated Underwriting System.
California High Debt To Income Ratio Home Loans
California’s home values are much higher than the national norm.
- Homebuyers in California will have higher mortgage payments and housing expenses than homeowners of other parts of the country
- Average home prices in California is $565,000 whereas national home values average just under $189,000
- California homebuyers will need more income to meet mortgage lending guidelines with regards of debt to income ratios
- California also has higher FHA and Conventional loan limits than other parts of the country
- Maximum FHA loan limits for high-cost areas in California is substantially higher than the standard FHA loan limit of $331,760
- The maximum loan limit in high-cost areas depends on the area
- The standard lending limit for FHA loans in average areas are capped at $331,760
Conventional loan limits in high-cost areas are higher than the standard conventional lending limit of $510,400.
High Debt To Income Ratio On FHA Loans
FHA Loans have the most generous debt to income ratio caps than any other mortgage loan program.
- Maximum front end debt to income ratio caps for FHA loans is 46.9% DTI
- Maximum back end debt to income ratio caps on FHA Loans is 56.9% DTI
- These ratios are for FHA home loan borrowers with credit scores of 620 FICO or higher
- For FHA borrowers with credit scores under 620 FICO, debt to income ratios are capped at 43%
Manual underwriting also caps debt to income ratios to 50% DTI with compensating factors.
High Debt To Income Ratio On Conventional Loans
Debt to income ratios on conventional loans is normally capped at 50% DTI. There is no front end debt to income ratio requirements on conventional loans.
Solutions To High Debt To Income Ratio
If the borrower’s debt to income ratios exceeds the maximum allowed, there are a few solutions.
- Installment debt a mortgage loan borrower is not responsible can be exempt from calculating debt to income ratios
For example, here’s a case scenario:
- if a borrower’s parent is paying for the borrower’s student loans
- the student loan payments can be exempt from the borrower’s debt to income ratios if the following:
- If parents co-signed for the borrower and they can provide the parent’s 12 months canceled checks that the parent has been making the student loan provider
Also, if a borrower is a co-signer on an auto loan or home loan to another person, that loan can be exempt if the following can be provided:
- the borrower can provide they are not responsible for the payment
- this can be done by providing 12 months canceled checks from the person making the actual payments
Adding Non-Occupant Co-Borrowers To Qualify For Mortgage
Both Conventional and FHA allows non-occupant co-borrowers to be added on the mortgage loan of a borrower to qualify for income. Non-occupant co-borrowers needs to be related to the borrower by law, marriage, or blood on FHA Loans. Non-occupant co-borrowers will go on the mortgage note but not on title to the property. With Conventional Loans, non-occupant co-borrowers DO NOT have to be related.
April 30, 2020 - 4 min read