The Debt-to-Income ratio is an important factor used when qualifying for a VA loan in California. But what is the Debt-To-Income ratio and how is it calculated?
The Debt-To-Income ratio, or DTI, is one of the factors lenders use to determine whether a borrower can afford their total payments, including the new housing payment, when purchasing a home. VA is fairly flexible with the DTI compared to other types of financing. VA's guidelines show 41% as the preferred DTI. But it is not uncommon for a VA loan to be approved with a DTI above 50%. Even 60% is not unheard of for a VA loan. It just depends on other factors, including a borrowers FICO score, reserves in the bank, and Residual Income.
Debt: Monthly Debt Payments
In the case of the DTI, Debt should really be thought of as the debt "payment". Debt-To-Income sounds like a comparison of a Veterans (since we're talking about VA loans) total debts compared to their income. But it really is the monthly debt payments divided by the gross (before taxes) income. For example, if a Veteran owes $30,000 on a car loan with a monthly payment of $500, it is the $500 that is used in the calculation. Not the $30,000. The DTI will be calculated the same way whether the Veteran owes $30,000 or $10,000. Student loans are probably a better example. A Veteran may have $200,000 in student loan debt, but if the monthly payment is only $300 because they're on an Income Based Repayment plan, then the fact that they have so much debt won't hurt them when qualifying for a VA loan.
Income: Total Gross Income before taxes
The income portion of the DTI is fairly straight forward. This is your gross monthly income. "Gross" meaning your income before taxes are taken out. If your annual salary is $120,000, then your gross monthly income is $10,000. If you also receive VA Disability income of $1,000 per month then your gross monthly income is $11,000. VA does allow for disability income to be "grossed up" by 25% since it is not taxed, but for now we'll leave that calculation alone. For self employed borrowers the Gross Income is calculated AFTER business expenses/writeoffs but before taxes. For example, a self employed person who "grosses" $300,000 but has $250,000 in expenses with an approximate taxable income of $50,000, has $50,000 of income for VA home loan qualifying purposes. Every situation is different, so make sure you have a VA Loan Officer who has experience with income calculation.
The Debt to Income Calculation
Now that we have the two main components of the DTI, lets do the calculation. Just divide the monthly payments by the gross monthly income. Let's start out with an example where a California Veteran buys a single family detached home for $700,000 with $0 down payment. Below is a breakdown of the payment assuming a Note rate of 3.625% and APR of 3.876%. We are assuming this to be the "first time use" for the Veteran, meaning a 2.3% VA Funding Fee brings the full loan amount to $716,100. The full PITI payment is $4,150, which is made up of the Principal & Interest ($3,275), Taxes ($729), and Insurance ($146).
Now lets assume our California Veteran has a car payment of $400 and student loan payment of $120. This means that his total monthly obligations, including the PITI, will be $4,670. If the Veteran's monthly income is $10,000, then the Debt to Income ratio is 46.70%. ($4,670 / $10,000 = 46.7%). In most cases, and as long as the Residual Income calculation is within guidelines, a 46.7% Debt to Income ratio on a VA loan will be lower enough for the Veteran to qualify to purchase the home. There are other factors that will need to be considered as well. For example, the credit and FICO score are very important. And of course, does this payment fit within the Veterans budget based on other potential expenses that the VA lender doesn't look at (going out for dinners on a regular basis, or vacation spending, tuition, etc). To have a solid idea of what payment will work and what will not, it's important to work with a California VA Loan Specialist. Below is a link to a complete breakdown of the numbers for buying a $700,000 home. When you click on the image you will also be able to watch a short video explanation of the VA Purchase Analysis.
The First Step in Buying a California Home with a VA Loan: PreApproval
The first step in buying a California home with a VA loan is to talk to a California VA Loan specialist. And we I say "California", I mean if you are planning to buy in California then make sure you are working with someone who also lives in California. If you are trying to get VA questions answered for a California home purchase from a VA lender in Missouri, good luck. California is unique. Our home prices tend to be higher than other states. Also, we have more condos, and to get a VA loan on a condo you need to find a VA approved condo project. That is not easy and an out of state lender will offer little help in determining which condo projects are VA approved. By working with a California VA Loan specialist, you will have the best chance at finding a qualified VA approved home and closing escrow with as little stress as possible.
Authored by Tim Storm, a California VA Loan Officer specializing in VA Loans. MLO 223456. – Please contact my office at Fairway Independent Mortgage Corporation NMLS 2289. My direct line is 714-478-3049. I will prepare custom VA loan scenarios that 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.
Having Zero Entitlement on your Certificate of Eligibility doesn’t mean you can’t buy home with Zero down payment using a VA loan. Earlier this year, an Air Force Veteran and his wife were considering the purchase of a new home. Being experienced homeowners, they began the mortgage pre-qualification process with a local mortgage professional. At the conclusion of the pre-qualification process, the mortgage professional determined that they were not eligible for a VA loan. The basis for the conclusion was that the Certificate of Eligibility (COE) showed the Veteran had ZERO entitlement available. Eventually they were offered an FHA home loan to buy the house and they successfully bought the home they had fallen in love with. But, that’s not the end of the story. (Read about VA Entitlement Codes.)
In order to close escrow and successfully purchase this home using an FHA loan, they were required to come up with a down payment of 3.5%, which they had not been expecting. Additionally, they were required to come up with pay the FHA Up Front Mortgage Insurance Premium (UFMIP) of more than $6,200. To put a little more salt in the financial wound, they were also required to pay a monthly Mortgage Insurance Premium (MIP) of $255. And, in case you weren’t aware, FHA MIP never goes away on its own. There are only a few ways to get rid of that monthly expense, including a refinance out of the FHA loan into either a VA loan at any LTV, or some other type of loan at 80% LTV or less.
Not All Mortgage Professionals Are Created Equal
A few months after the couple moved into their new home, they wondered if they could have used a VA loan to buy the home. They searched the internet for a California VA loan specialist who they could call to discuss their situation. After only a brief conversation and a few pointed questions, we determined they most likely could use a VA loan to finance their home. Additional good news was that it wasn’t too late to save a lot of money. The difference between the response they got before and the results we came up with together, have to do with something called Bonus Entitlement. Most Loan Officers do not understand how Bonus Entitlement works, or that it even exists. This is one of the reasons why Veterans should always work with a Loan Officer who lives and breathes VA loans.
Bonus Entitlement – What is it?
Before discussing Bonus Entitlement, it’s important to clearly understand the VA Guaranty. The VA guarantees the mortgage lender up to 25% of the loan amount, in the event the buyer defaults on the loan. This VA Guaranty is called the Veteran’s Basic Entitlement, and it amounts to $36,000. So if you’re buying a home that costs no more than $144,000, you can buy the home with no down payment. That’s right, the math is pretty simple: $144,000 / 4 = $36,000.
While that may be great news in some parts of the U.S., it doesn’t get Veteran’s into homes in most of California. This is where Bonus Entitlement comes in. This is also where the other mortgage professional let our Veteran down. The fact of the matter is that Eligible Veterans have a combined entitlement of Basic + Bonus, which can be used together to finance a home.
Your Bonus Entitlement is calculated in the same way your Basic Entitlement is calculated. However, instead of using the Basic purchase price of $144,000, we use the maximum VA Loan Limits by County in which you intend to live. In the case of our clients above, they were buying in a county where the limit was $636,150.
And again, using the same math to derive the Basic Entitlement, we see the following: $679,650 / 4 = $169,912.
Before we can calculate the correct Combined Entitlement for our clients, we need to keep in mind that the COE showed they had ZERO Basic Entitlement remaining. So their combined entitlement would be calculated by reducing their Bonus Entitlement by the amount of their Basic Entitlement previously used and not restored, as follows:
Bonus Entitlement: $169,912
Less Basic Entitlement: $36,000
Combined Entitlement $133,912
Now it’s time to remember the VA Guaranty, that says they’ll cover 25% of the Loan Amount. That means that we now know the maximum Loan Amount for our clients to finance a home with a VA loan using no down payment or equity. All we have to do is take the Combined Entitlement and multiply it by 4, giving us the maximum loan amount for this particular county for our Veteran of $535,650. Once we knew the current loan amount was only $360,000, we were able to confidently lock in a significantly lower interest rate than their FHA loan. Additionally, we removed the monthly Mortgage Insurance with their new VA loan. Even better, the COE showed the Veteran was disabled and was to required to pay ZERO Funding Fee.
In the end, it worked out for this couple. But the difference between an experienced Mortgage Professional and an experienced VA Mortgage Professional, can sometimes make or break your deal. And even though this couple got their home, they paid thousands of dollars needlessly and had to go find a true VA loan Expert to help them get the loan they deserved.
Authored by Tim Storm, a California Loan Officer specializing in VA Loans. MLO 223456. – Please contact my office at the Home Point Financial. My direct line is 949-640-3102. www.CaliforniaVALoanExpert.com. 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 the your scenarios so that you are able to fully understand the numbers BEFORE you have started the loan process.
Many Veterans don’t realize that it is possible to restore VA eligibility for a home loan. The VA home loan is not just for first time home buyers and is not a one time use program. However, there are guidelines that effect a Veterans ability to have more than one VA loan at a time. It is important that once a previous VA home loan has been paid off that the Veteran notify VA of the disposition of the loan. Once VA has proof of the pay off of the loan then the Veterans Entitlement can be restored. There are a few different possibilities when it comes time to restore your VA eligibility.
Use the VA Form 26-1880 to Restore VA Eligibility
If you bought a home with a VA home loan previously and then sold the home you will need to complete the VA Form 26-1880 (you will complete the form in any situation). You will also need to send in a copy of the certified closing statement for the sale of the home. Once VA verifies the loan has been paid off satisfactorily then the Entitlement and VA eligibility should be restored back to 100%.
If you bought a home with VA financing previously and later paid off the VA loan but still own the home, then you may apply for a One Time Only Restoration of Entitlement to purchase another home. Proof of the loan being paid off needs to be verified by VA, and of course the complete VA Form 26-1880 needs to be completed.
If you bought a home previously with VA financing and later sold the home, with the buyer assuming your VA loan, then you may use the 1880 form to check as to whether you have at least a partial Entitlement remaining. Until the assumed VA loan is paid off you will not have 100% Entitlement. However, depending on the new purchase price you may still be able to buy a home with VA financing with $0 down with a partial Entitlement.
Retrieve Your Certificate of Eligibility Before you Make an Offer on a Home
It is very important that you retrieve your Certificate of Eligibility before making an offer on a home. The VA Form 26-1880, also known as the Request for Certificate of Eligibility, just needs to be submitted to VA. For California Veterans, the fastest and easiest way to do this is through a California VA approved lender, who can quickly access the Certificate of Eligibility through the VA portal. A direct California VA lender should be able to access the Certificate of Eligibility within minutes in many cases. If there is information that VA needs to verify it could take a few days, but is still quicker than having the Veteran mail the 1880 form in.
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 the your scenarios so that you are able to fully understand the numbers BEFORE you have started the loan process.
The short answer to the question “How many VA loans can I have in California?” is that there is no limit on the number of times eligible California veterans are allowed to use their VA loan benefits.
This answer often surprises California veteran borrowers who have used the program before.
In many ways, the procedure for getting a second (or third, or fourth…) VA loan is similar to obtaining the initial home financing.
First, veterans must be able to show that they satisfy the basic eligibility rules mandated by the U.S. Department of Veterans Affairs. The eligibility requirements can be found at the following Department of Veterans Affairs General Rules of Eligibility website.
Second, the VA loan has to be received through a lender that has been approved by the U.S. Department of Veterans Affairs. It is important to check with lenders prior to starting the to ensure that they are qualified to provide a VA mortgage. It helps to be work with a local California VA loan lender if you are planning to buy a home in California.
Third, the VA will analyze your mortgage application including your payment history on your previous loan to see if you have a history of paying your mortgage on time or have gone into default at some point.
The VA loses money when veteran borrowers go into default, which means they are essentially doing a cost analysis on you to decide whether or not to grant you another VA loan. In addition, if the VA suffered a loss on a previous loan you will be required to repay it before having your eligibility fully restored.
If you currently have a VA mortgage or have had one in the past, then you already know about the required VA funding fee. However, there are differences between what the funding fees are for first-time VA loan borrowers and subsequent borrowers. Of course, if you are considered by VA to be at least 10% disabled, then the Funding Fe can be waived.
For VA loans, regular military members are categorized as either a first time user or a subsequent user. For first time users the fee structure is set up as follows:
No down payment: 2.15% fee
Up to 10% down payment: 1.5% fee
More than 10% down payment: 1.25% fee
For subsequent users the fee structure is:
No down payment: 3.3% fee
Up to 10% down payment: 1.5% fee
More than 10% down payment: 1.25% fee
The funding fee requirement for both the Reserves and National Guard members is different than that for the regular military. For first time users, the fee structure is:
No down payment: 2.4% fee
Up to 10% down payment: 1.75% fee
More than 10% down payment: 1.5% fee
For subsequent users the fee structure is:
No down payment: 3.3% fee
Up to 10% down payment: 1.75% fee
More than 10% down payment: 1.5% fee
Basically, the only difference between funding fees for first-time and subsequent VA loan borrowers is for “no down payment” scenarios.
If you are planning on making a down payment on your subsequent VA loan, then there will not be any different from what you would pay for a first-time VA mortgage.
It’s important to understand that you may not hold more than one VA loan at a time. The loan you took out previously must be repaid in full before you will be eligible to apply for a new VA mortgage. If you still own the property but it is no longer financed with a VA loan (either because you refinanced or paid off the mortgage) you may request a one-time exception to have your eligibility restored.
Even if the loan was assumed by another party, the loan must either be repaid or if the assumer is eligible for a VA loan, they could transfer their eligibility to the loan.
If you have used your eligibility before, it is important to contact a California VA lender who can help check on your eligibility status.
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 the your scenarios so that you are able to fully understand the numbers BEFORE you have started the loan process.
Contact Me
Tim Storm
MLO# 223456 Arbor Financial Group Mortgage Advisor 1805 E Garry Ave Santa Ana, CA 92705
Having Zero Entitlement on your Certificate of Eligibility doesn’t mean you can’t buy home with Zero down payment using a VA loan. Earlier this year, an Air Force Veteran and his wife were considering the purchase of a new home. Being experienced homeowners, they began the mortgage pre-qualification process with a local mortgage professional. At the conclusion of the pre-qualification process, the mortgage professional determined that they were not eligible for a VA loan. The basis for the conclusion was that the Certificate of Eligibility (COE) showed the Veteran had ZERO entitlement available. Eventually they were offered an FHA home loan to buy the house and they successfully bought the home they had fallen in love with. But, that’s not the end of the story. (Read about 
