Bill Zielinski

Someone Forgot to Tell Fannie, Freddie About Lowering Debt Ratios

I was primarily speaking of the front end debt ratio. The point is, if mortgages are being modified to 31% and HUD is saying that this is a proper and safe debt ratio, why are new loans being approved at much higher front end debt ratios? I commonly see approvals with a back end ratio in the mid 40's or low 50's which, as I noted, probably puts way too much stress on a homeowner's financial situation.

For those borrowers with little other debt, many are approved with a front end ratio far in excess of the HUD recommended front end ratio of 31%. The government's policies are inconsistent.
Also, each bank can apply different rules as well; here's a summary of one major bank that announced they were "tightening" debt ratios (in this case, the back end).

"Important Update Regarding Revised Maximum Debt-to-Income (DTI) Ratios on all AUS
Approved Government Loans
Effective for new locks on or after Monday, March 2, 2009, the maximum debt-to-income (DTI)
ratio for all AUS approved government loans will be fifty percent (50.00%) regardless of the
AUS approval or recommendation. This new requirement applies to FHA and VA loans
approved through DU/DO and/or LP.

Bottom line - a lot of borrowers are still being approved and taking on payments that probably can't be handled in the long term


On Jul 13 01:46 PM mortgagedaddy wrote:

> I have to correct you, sir. It is NOT common to see mortgages approved
> with a ratio (like the one you speak of) at or above 50%. I am a
> mortgage broker and the ratio in your blog of 31% is the font end
> ratio or top ratio. It refers to the individual's % of gross monthly
> income going toward the monthly payment. It would be a shocker to
> me for someone with a front ratio of 50% to get approved for a conventional
> or FHA loan. Now, the back end or bottom ratio, which is the percentage
> of gross monthly income going toward all monthly credit report debt
> including the new mortgage, does get approved sometimes even if it's
> over 50%. You have to be clear. To say 31% is good, but loans are
> getting approved with % over 50, is wrong.