Is DTI Out The Window?
DTI has been a component of mortgage underwriting and loan underwriting for decades. The general rule was 28/36 for a long time. If you are unfamiliar with DTI, pick up a copy of Winning Mortgage, Winning Home; you should not be applying for a mortgage without understanding these numbers and what they mean for you. Politicians pushed to raise these numbers in the early 2000’s to make mortgages “more affordable” for low income borrowers. Home sales and lending quickly ramped up. The result–the “more affordable” ended up destroying the lives of many lower income borrowers in the 2008 financial crisis in which the loosened mortgage standards were the biggest contributor. More affordable actually ended up meaning foreclosure for lack of ability to repay. Lawsuits, regulatory actions, and a meltdown came afterwards, but too late for millions. Many should never have been approved for a mortgage and it ended up with a ripple effect of harm for those who could afford a mortgage, but ended up jobless and out of a home due to the many factors of industry doing what the politicians wanted, but the inevitable scammers and profiteers gravitating to easy money from the government.
Enter the concept of QM/ATR. A Qualifying Mortgage (QM) became a safe harbor for lenders. Lenders which had underwritten carefully the borrower’s Ability to Repay (ATR) could not be the subject of any regulatory or private action claiming predatory lending or making an inappropriate loan to a borrower who never should have had a mortgage. As a result, mortgage qualifying became more difficult for borrowers; the average credit score for borrowers has soared. Verification of every financial and employment scrap of paper became more pronounced and detailed. Borrowers with lower credit scores still have programs and loans available, however, a longer process has evolved and underwriting remains strict. In the end though, lower interest rates have been the savior of a great number of buyers. That factor is the biggest offset in the borrowers favor for qualifying.
Now, the Consumer Finance Protection Bureau (CFPB) is undercutting some of the protections for QM/ATR. Where the standard rose from 28/36 to allow the second number as high as 43 over the years and even to 45 for Fannie Mae and Freddie Mac (and therefore the majority of lenders), CFPB is pulling the plug on some aspects of this. In the case of first time borrowers and special programs, the 45 could even go to 50.
With CFPB’s new rules, Fannie and Freddie are backing away from loans that previously provided lenders with QM/ATR safe harbor. The rule is going to a pricing orientation and will be more amorphous, less defined, and more subject to interpretation and disparate treatment of borrowers. DTI will still be a key, but now lenders will be less willing to lend to borrowers at the DTI high thresholds for fear of regulatory action. Look for loan qualifying to start being tweaked as to more difficult to qualify at the higher DTIs or loan pricing to increase to offset the risk of a loan being non-QM/ATR tagged. Because the rules will focus more on pricing, once a lender is at that point of non-QM/ATR, the lender can choose either to not make such loans or price accordingly. Various lenders are likely to evaluate the risks and adjust programs and underwriting and approvals accordingly. It may make your choice of lender contingent on asking more upfront questions if you are at the upper end of DTI ratios. Don’t be afraid of picking a different lender if the questions you ask aren’t answered satisfactorily on the pricing QM/ATR issues.