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Now a Good Time to Buy? Guide to Borrower Debt-to-Income (DTI) Qualifications

Rents continue to rise in the United States…

Through June of 2014, Rents rose 5.5% across the nation’s 25 largest metro areas, according to Trulia.com. Over the past 12 months, Rent growth has outpaced pay growth, and as Rents rise, metro areas are more and more unaffordable.

 

Is now a better time to buy?

CNBC real estate reporter Diana Olick doesn’t think so. She recently wrote a column titled “Housing Still too Expensive Despite Positive Signs.”

Olick poses the question: why have home sales have slowed year-over-year despite favorable mortgage rates, slowing prices gains, and improved employment?

For starters, even as price gains “slow”, 97 of the largest 100 metro areas still saw yearly increases. Overall, Trulia estimated that the median price for home sales was up 8.1% in June over the previous year.

Beyond the price increases, Olick points out (with some alarm) that the 2014 implementation of the Qualified Mortgage (QM) rule by the Consumer Financial Protection Bureau might be hurting the very same buyers / consumers it professed to help.

“New mortgage rules, designed to protect borrowers, set strict limits on the amount of loan debt that can be carried as a percentage of a borrowers’ income – 43 percent. This so-called debt-to-income ratio has kept some renters out of home ownership…”

The QM rule regulates loan products that fall outside of conventional guidelines by capping lender fees, restricting “risky features”, and creating qualified borrower limits (the 43% debt-to-income max).

 

So… is the QM rule hurting homebuyers?

Perhaps a bit, but not by much.

Any questions about home loans in California? We are The Mortgage Experts: ask us anything! We have a loan program to fit every need. Call 805.543.LOAN or email us today.

First of all, most home loans do not need to meet the 43% DTI “QM” restriction. Why? Because the QM rule makes an exception for government-backed mortgages like Conventional loans (Fannie- and Freddie- backed), FHA loans, VA loans, and USDA loans.

These loan program make up the vast majority of new originations, and have much more flexible DTI ratios.

Central Coast Lending offers the following DTI qualifications:

  • Conventional (Fannie and Freddie): 50% DTI (LINK)
  • FHA: 57% (47% of which can be for real estate) (LINK)
  • USDA: 43% (29% of which can be for real estate) (LINK)
  • VA: 60% (LINK)
  • Mobile Homes: 45% (34% of which can be for real estate) (LINK)
  • Jumbo: 43% (LINK)

Debt-to-income (DTI) ratio describes the borrower’s total debt, as calculated by adding the minimum payment for everything that shows up on their credit report. Relevant debt includes student loans, installment loans (cars, RVs, boats, etc), and real estate loans. Payments for smaller items like utilities or cell phone bills do not count towards total debt unless they become collections.

The real estate portion of the DTI is calculated by adding the the total monthly payment (Principle Interest Taxes and Insurance – PITI) and comparing it to gross monthly income.

For example, the DTI for a borrower with a $5,000 gross monthly income (pre tax) and a $1,600 monthly mortgage payment would be 32%. Adding in a $300 monthly car payment and a $200 monthly student loan would bring the total monthly debt to $2,100 and the DTI to 42%.

Most borrowers qualify under one of these popular programs. Borrowers (and properties) that do not qualify are able to seek out “non-qualified” mortgage products (non-QM) from lenders who are willing to take on greater risk.

In our non-QM product overview, we wrote:

Lenders take on greater risk by underwriting non-QM loans, so they require very specific qualification standards to asses the borrowers ability (and likelihood) to repay the loan. Specifically, lenders offering non-QM loans must maintain a minimum 5% stake in that loan for the life of the loan rather than selling the loan entirely as is typically the case with QM loans.

Lenders might be more strict in qualifying borrowers for a non-QM loan, but the fact is that these loans do exist to meet demand.

To recap, is it true that the QM rule is slowing the housing market? Perhaps to a small degree, but only for the most borderline borrowers.

Several weeks ago we wrote about “millenials” as a key to the changing housing market. Millenials are going to school longer and delaying household formation. Rampant student debt is also hurting the home loan qualification process (increasing DTI, for one).

“Give it time” is a clear solution here, but luckily for San Luis Obispo County, we are already in a good position to weather the storm. A recent Tribune headline proclaims “SLO County among top 10 areas in U.S. for millennial job growth.”

There is nothing quite like a good job and regional economic development to fortify the housing market.

 

Mortgage Rate Update

Over the past month, mortgage rates have dipped and jumped a bit based on the major headlines of the day (poor GDP, positive employment), but as the smoke clears, nothing much as changed. Rates are just slightly lower than they were in June, and very close (or at) 2014′s lowest levels.

See our latest update of mortgage rates for 10 loan programs here.

This week, housing starts / home construction data will lead housing market headlines.

 


Central Coast Lending is a California mortgage broker and direct lender based on the Central Coast of California in San Luis Obispo County. Call us today at 805.543.LOAN or email info@centralcoastlending.com to set up a free pre qualification. We are The Mortgage Experts: ask us anything!

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