New Mortgage rules: Debt to Income Ratio
The new mortgage rules called Qualified Mortgage or QM impact many parts of the real estate loan process. A major new rule is the maximum Debt to Income Ratio (DTI) or some times called the back end ratio. QM sets the new maximum DTI to 43%. This is lower than current standards.
The clear impact of the new rule is less people will qualify for a QM loan. Is this a good thing, or bad thing only time will tell?
What is a Debt to Income Ratio? The Debt to Income Ratio compares the applicant’s total fixed monthly expenses like monthly housing expense and other monthly debt obligations to their gross income. An example of monthly housing expenses are:
Monthly housing costs or Housing Ratio
Home equity loan payments
Monthly credit card minimum payments
Personal loan payments
Student loan payments
Monthly alimony or child support payments
Any other standing monthly payments
The first item on the list is the housing ratio. The housing ratio is also called the housing expense ratio or front end ratio. The housing ratio compares the applicant’s monthly loan payment to their income. The loan payment includes the monthly principal and interest payment; any private mortgage insurance (PMI) or mortgage insurance premium (MIP) payments; 1/12 property tax bill; 1/12 homeowner’s insurance premium; any monthly homeowners’ association dues (HOA). Sometime the acronym PITI is used for these expenses. PITI is Principal Interest Taxes and Insurance.
Knowing the QM rule of 43% DTI can be the basis to find out how much house a person can afford to buy, based on his income and other expenses. This may entail certain income tests involving analysis of income and use of these qualification ratios. The qualifying ratios are the housing ratio, or front-end ratio, and the debt ratio, or back-end ratio. An applicant must be required to satisfy the DTI ratio to qualify for a QM loan.
Dan Parisi is CEO of Coffee Real Estate
916 481 8106
Real Estate agent & Mortgage expert
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