How Much VA Mortgage Can You Afford in California?

VA mortgage affordabilityHow much VA Mortgage can I afford?” is one of the most commonly asked questions a California Veteran has during the process of buying a home, And whether it’s you asking that question of yourself, or a lender calculating it for you, at some point along the way, you’ll need an answer to this question, along with “what is needed to qualify for a VA loan?”. So the sooner you understand how this is calculated, the sooner you’ll discover what price range of home you should be looking at.

Lender Lingo

Before we get too deep into the weeds of mortgage industry lexicon, let’s take a look at some basic terms used in this analysis.

  • Qualified Income: This is the amount of income your Loan Officer feels confident will be approved by underwriters. Let’s say you make a base salary of $108,000 per year, but you’re also eligible for Overtime and Bonus Income. Typically you will need to have earned overtime and bonus income for two years before it can be added to your Qualified Income. A two-year average of the Overtime and Bonus Income is used. This is also true of Commission Income. Most importantly, the income used to qualify you will always be your Gross Income; i.e. before taxes. (for self-employed borrower, the income after expenses, net profit)
  • Debt to Income Ratio (DTI): What percentage of your Qualified Income is being used to pay all your monthly debt obligations? This is just simple division, where you take the amount you owe monthly and divide that amount by your Qualified Income. Your monthly debt will not include things like taxes, car insurance, groceries, utilities, etc., but will include car payments, minimum credit card payments, student loans, and any other monthly payment that appears on your credit report.
  • Maximum DTI: Underwriters cannot let you spend more than the lender guidelines allow for your specific loan product. There needs to be room in your Qualified Income to pay state & Federal taxes, buy groceries, gas for your car, etc. And if after a full review of your financial documentation, your Loan Officer calculates your DTI to be higher than the maximum allowed, then you may want to lower your price point for the new home. The good news for California Veterans is that VA loans have the highest DTI allowance of all mortgage products. Technically VA does not have a maximum DTI. While VA does not institute a maximum DTI, most lenders do. Some lenders will not allow the DTI to be higher than 50%, and some cap it at 55%. But there are lenders that will follow VA and not have a maximum DTI, instead relying on VA’s Residual Income calculation.
  • Residual Income: The only loan program that uses the Residual Income calculation is VA. This carries more weight the DTI when it comes to VA loans. Residual Income is essentially what is left of your income after paying your PITI, car payments, student loans and other debt payments, income taxes, and home maintenance. Yes, this calculation takes into account home maintenance and changes based on the size (square footage) of the home you buy. The calculation also takes into account how large your family is. For example, a family of 5 will need to have more Residual Income than a single Veteran.
  • Housing Expense: How much money are you obligated to pay each month to sustain the home in question? Lenders call this your PITI(A). It’s the full monthly cost, including Principal & Interest payments on your mortgage, Property Taxes to the County, and the monthly cost of your annual Homeowner’s Insurance policy. Additionally, if your home is located in a community managed by a Homeowner’s Association, your housing expense will need to include your monthly HOA dues. Note that whenever a Lender discusses PITI, it is assumed that it’s “all-in”, including any HOA, 2nd mortgage payments, Lease Payments, etc.california va mortgage calculator

Examples of Debt to Income Calculations

Now that we’ve reviewed some basic definitions, let’s run thru a couple of examples to see how it all comes together

Here’s a fairly typical example of Consumer Debt for an average household:

  • Car Payment #1     $300
  • Car Payment #2   $450
  • Visa Card                $25
  • MasterCard   $150
  • Student Loans   $250
    • Total of Consumer Monthly Debt Obligations $1,175

Now let’s look at a hypothetical breakdown of PITI for the house you’re looking to buy. We’ll assume the property is in Orange County where the High Balance Conforming Loan Limit is the highest in the state, according to the FHFA. If we use 100% VA financing, we’ll have a loan amount of $679,650 (2018 Orange County loan limit for 100% financing). *Note: Because your PITI will require knowledge of current interest rates and the subsequent Principal & Interest payment, as well as qualifying estimates for Taxes & Insurance, you will need to speak with an experienced Mortgage Loan Originator – VA Specialist to get an accurate estimate for PITI.

  • Principal & Interest on new mortgage (P&I) $3,244 (using 4.25% note rate, 4.37 APR on Jan 7, 2018, assuming no VA Funding Fee)
  • Property Taxes (T)    $707  (1.25% of purchase price / 12)
  • Homeowner’s Insurance (I)    $141   (.25% of Loan Amount / 12)
  • HOA Dues (A)        $0
    • Combined total of PITI $4,092
  • The total amount used for DTI calculation  ($1,175 + $4,092) $5,267

Now that we have an accurate number for the total amount of debt required to be serviced each month, we can look at the Qualified Income and come up with a DTI. If we find after a full review of your complete income documentation that you have Qualified Income of $9,000 per month, then we can derive your DTI immediately by the following calculation:

$5,267 ÷ $9,000 = .626 (58.52% DTI)

This DTI is too high for either FHA or Conventional mortgages, but could still work with VA Financing depending on the Residual Income and other compensating factors. However, since many lenders max the DTI for 100 % VA Financing at 55%, and because we want to make sure you have money left over to go out to dinner or maybe even take a vacation,  we should work our initial plans to be at or below 55%. (Even 55% is very high. But for someone who has income that is not being used in the debt to income calculation, pushing the DTI to 55% may not be a big deal.).

In an analysis like this, we know that certain things cannot change. For example, we cannot increase your income without clear, complete and acceptable documentation to support it. And on the other side, you have the monthly consumer debt. We’ll assume that none of those debts can be paid off and therefore must remain in your DTI calculation. It follows then, that if: a) your income and debt cannot change; b) the DTI maximum is fixed, and c) your DTI is too high, then the only other variable that can change is the PITI on the new home. Therefore, we simply take 55% of your Qualified Income ($9,000 x 55% = $4,950) and subtract out the Consumer Debt of $1,175. This leaves us with an all-in PITI that cannot exceed $3,775 since doing so would put your DTI over the declared maximum.

The rest of it is up to your Loan Officer. Again, calculating the monthly PITI will require guidance on current rates for your specific transaction. But let’s lower the hypothetical purchase price to $600,000 and see if it works using the same assumptions as before.

  • Principal & Interest on new mortgage (P&I) $2,952 (using 4.25% note rate, 4.37 APR on Jan 7, 2018, assuming no VA Funding Fee)
  • Property Taxes (T)   $625
  • Homeowner’s Insurance (I)   $125
  • HOA Dues (A)       $0
    • Combined total of PITI $3,702
  • The combined total for both consumer debt and the proposed PITI $4,877

Using the same formula as before, the DTI calculation would look as follows:

4,877 ÷ 9,000 = .5234 (54.18% DTI)

In our examples above, we started with a hypothetical purchase price of $679,650 but quickly discovered the DTI of 58.52% was higher than many lenders will allow. In our second example, we found that a purchase price of $600,000 provided us a DTI of 54.18%, which may be more feasible for our test borrower. We can, therefore, conclude that the approximate maximum amount of mortgage that you can afford is very near the $600,000 level. To go out shopping for homes much higher than that would potentially put you in a situation where you couldn;t afford to do anything beyond making your house payment.

One final thing to remember about maximum DTI: Every loan product, mortgage type and indeed, every individual loan application, will each have their own limits. We’ve used a maximum 55% in our VA examples above, but the VA is in the habit of helping Veterans get into homes, and it’s not at all uncommon to see an underwriter make an exception if there are what we call “Compensating Factors” on your application. Things considered as compensating factors include excellent credit, large amounts of assets in savings and retirement plans, several years in the same job, etc. Conventional loan guidelines are less forgiving, and you will find that the 50% maximum DTI on most Conventional loans is fixed without exception. Always work with an experienced Mortgage Loan Originator to find out what will apply in your situation.

Authored by Tim Storm, a California VA Loan Officer specializing in VA Loans. MLO 223456. – Please contact my office at the Home Point Financial. My direct line is 949-640-3102. I will prepare custom VA loan scenarios which will be matched up to your financial goals, both long and short-term. I also prepare a Video Explanation of your scenarios so that you are able to fully understand the numbers BEFORE you have started the loan process.

What is Needed to Qualify for a VA Loan in California?

What is needed  to get a VA loan in California?2017 California VA loan limits

Fannie Mae recently released their “What do consumers know about the Mortgage Qualification Criteria?” Study. The study revealed that Americans are misinformed about what is required to qualify for a mortgage when purchasing a home. For California Veterans, understanding what is really needed to qualify for a VA loan is very important.

According to the study:
59% of Americans either don’t know (54%) or are misinformed (5%) about what FICO score is necessary
86% of Americans either don’t know (59%) or are misinformed (25%) about what an appropriate Back End Debt-to-Income (DTI) ratios is
76% of Americans either don’t know (40%) or are misinformed (36%) about the minimum down payment required
To help clear things up for the California Veterans who are wondering what the true answers to these questions are, let’s take a look at the findings from Ellie Mae’s latest Origination Insight Report , which focuses on recently closed loans.

FICO Score for California VA Loans

According to the report, the average FICO score for a closed VA loan as recently as November 2015 was 704. While this shows that in general Veterans have very good FICO scores, it’s important to know that some VA lenders will allow a FICO score to be as low as 580. If a Veteran is ready to buy but is concerned his FICO score may be too low, talk to a California VA Lender who can check your FICO score. Even if your score is lower than 580 the VA Loan Officer should be able to provide on guidance on improving the FICO score.

VA is also fairly lenient when it comes to prior bankruptcy’s and foreclosures, requiring only a two year wait.

What Debt to Income Ratio is Needed for a California VA Loan?

It is understandable that 86% of consumers would not know the required Debt to Income ratio for a loan. Each type of loan program has different guidelines and requirements. For a VA loan, the “guideline” Debt to Income ratio is 41%.  According to the Ellie Mae report, 40% was the average Debt to Income ratio. But the reality is that VA doesn’t really have a “max” Debt to Income Ratio. VA uses a Residual Income calculation, which is the more important “approved or not approved” calculation. In California, where home prices tent to be higher than most of the country, it is not uncommon for a DTI on a VA loan to be over 50%, and in some case higher than 60%. If the California VA lender is able to get an Automated Underwriting System approval (through either Fannie Mae or Freddie Mac) then the lender can fund the VA loan. Some lenders do have “overlay” requirements and may not allow the DTI to be higher than their internally prescribed number, which is why it’s important to check with multiple lenders if you have been turned.

The Debt to Income ratio for a VA loan is calculated by dividing your total payments (mortgage payment, including the property taxes, homeowners insurance, homeowners association payments, etc, plus any car payments, minimum credit card payment, installment loan payments, alimony, child support, student loans, etc) by your gross monthly income. Self employed Veterans should talk to a lender for help in calculating the income to be used for qualifying.  It is not always as straight forward as people would like.

Down Payment for a California VA Loan?

Hopefully most California Veterans know that they are able to get a VA loan with no down payment. But they do need to stay within the county VA loan limit if they intend to purchase a home with $0 down. Because there are situations where a down payment is needed. For example, if a California Veteran wishes to purchase a home that is priced higher than the VA loan limit for that county then they will need a down payment equal to 25% of the difference between the county loan limit and the purchase price. This is called a Jumbo VA Loan. For example, if a California Veteran is going to purchase a home in Los Angeles County with a VA loan for $736,150, which happens to be an even $100,000 above the Los Angeles county 100% VA loan limit then they will need a down payment of $25,000. The VA loan will be $711,150. In this case a down payment of only 3.4% was needed.

The bottom line is that whether you are hoping to buy your first home or are planning to buy your dream home, understanding how qualifying works will make the home buying process much easier. Talking to a California VA lender before you are ready to make an offer can save time and frustration.

Authored by Tim Storm, an Orange County VA Loan Officer specializing in VA Loans. MLO 223456. – Please contact my office at the Home Point Financial. My direct line is 949-640-3102. I will prepare custom VA loan scenarios which will be matched up to your financial goals, both long and short-term. I also prepare a Video Explanation of your scenarios so that you are able to fully understand the numbers BEFORE you have started the loan process.