March 2nd, 2020 1:24 PM by Steven Hofberg
Sometimes news creates an opportunity for us to explain to our readers various parts of the mortgage process. That happened this week when business media highlighted the fact that a significant rule may expire this year. The rule involves one of the most important metrics for evaluating a mortgage application, the Debt-to-Income ratio (DTI). Your DTI is calculated by taking your monthly housing expenses (including insurance, taxes, and HOA/condo fee) and adding to it your other fixed monthly expenses such as auto loans and the minimum payment on any credit card debt. Divide that total by your monthly income. That is your DTI. Besides your credit score, it is the most important number in qualifying you for a mortgage.
For example, your housing expense is $2200 per month. Your car loan is $350 per month. Perhaps you also have a small credit card balance which has a minimum monthly payment of $20. Your monthly gross income is $7000. Therefore, your DTI is approximately 38%. That is a number that will get you easily approved for a mortgage, all other things being equal.
The rule that may be allowed to expire is one that allows your DTI to exceed 43%. That max DTI was established in the wake of the 2009 financial crisis, but Congress and our regulators made a rule that allowed the DTI limit to exceed 43%, and in fact up to 50%, if your loan application is approved under rules established by Fannie Mae and Freddie Mac. These exceptions make sense because Fannie and Freddie approve mortgage applications based on a totality of factors, as opposed to just one single factor. However, if not extended, the maximum DTI for what are considered “Qualified Mortgages” will be 43%, regardless of any compensating factors.
We have always found that having extra flexibility regarding DTI has helped many of our clients, particularly when there is income that cannot be counted for qualifying purposes such as irregular bonuses or room rents. We will keep an eye on whether this flexibility will continue, and keep you posted.
Steven H Hofberg, Operations Manager