Debt-to-income ratios are arrived at by dividing the minimum monthly payments a borrower must make by that borrower’s gross (that is to say, pre-tax but, for self-employed people, after expenses) income.
The maximum allowable DTI depends on lender, loan program, and credit scores and history.
Most people deal with QM loans (Qualified Mortgage Loans), one of the Dodd-Frank parts.
Qualified mortgages limit the DTI to 45%. Dodd Frank stipulated that FHA loans (and other government-backed (insured) loans would drop their DTI to 45% within a few years of the implementation of Dodd-Frank.
So far (today is September 4, 2017), the FHA’s maximum DTi is still 55.99999%.
At the end of July, Fannie Mae raised its maximum DTI to 50% (stating that it’s studies tons of loans and noticed that there’s no increased risk between 45% and 50% DTI loans). Which, now, means it is possible to have QM and non-QM Fannie Mae (that is to say, conforming conventional) loans.
Brief reminder: with QM loans, it is harder for borrowers to sue lenders as lenders are presumed to have made certain that the borrower could afford the loan and knew what he/she was getting into.
DTI and Credit Scores
Most lenders (maybe all) have automated and manual ways of underwriting applications. If a pre-qualifying program states a borrower is too much a risk for automation, a manual underwriting will be performed.
The main trigger for manual review is the middle score of a borrower. 639 and less will trigger manual underwriting.
(If you’re interested in finding out the DTI limits that would apply to you, call me at 847-840-8884.)
If you’re thinking, So what?, here’s so what:
Manual underwriting has lower DTI, under 37% / 43% instead of 47% / 56% for an FHA loan.
DTI’s a few points lower means loan amounts a lot lower. An income of $5000 a month allows for $2,799.99 a month in debt payments to stay under the 56% FHA limit but but only $2,349,99 to stay under the 47% limit.
That’s the difference between a nice car payment or a home that’s $70,000 cheaper (at interest rates of 4%, property taxes of $550 a month, property insurance at $72 a month).
As you can see, there are other variables that come into play, but the amount is huge, even if those variables change some.
If you’re interested in finding out the DTI limits that would apply to you, call me at 847-840-8884.