Mortgage Underwriting Guidelines & DTI - (@Bill Gulley)

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Mortgage Underwriting Guidelines & DTI - (@Bill Gulley)

Nicholas B.
Finance, Credit, and Insurance · Northwestern, PA · Member since 2015 · 56 posts · 20 votes

In another thread, @Bill Gulley and I had a brief discussion on underwriting guidelines. Rather than take that thread off topic, I created this one to hopefully further the discussion. The main contention was whether a lender will consider excessive availability of revolving credit (large open credit card limits) as a negative in calculating your ability to pay or DTI.

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Originally posted by @Bill Gulley:

I assume the credit underwriting you do is with insurance risks, I'd agree.

You can check fannie mae underwriting, if a credit card has a zero balance, and that account is still open, half the high credit amount that had been used is used to compute debt ratios. High credit outstanding within a year, say $5,000.00, at application it has a zero balance, say terms of that card are 3% of balance out standing, then it would be:

$2500 x 3% = $75.00 payment computed to the debt ratio.

This is because, under prudent LOAN underwriting, it is assumed if the account is open, it will be used. That is why I suggested to close accounts not used.

Lenders look at the ability to pay, not your ability to carry credit long term or create more credit. Now, the other side is the ability to carry credit is to other dealings, you have the debt and meet the obligations, like your insurance company, they don't care how much you make but they do want to see you paying everything as agreed and they don't like seeing you in a financial bind, that's an indication for making false claims.

We're talking loans for real estate here, at least I am. :)

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@Bill Gulley, I hope you'll take some time to discuss this as it is of great interest to me and you seem knowledgeable in this area. To clarify, I underwrite loans and sell insurance. I don't underwrite for an insurance company.

I researched the Fannie Mae guidelines a bit since I have no experience with this type of entity. I did find a list of guidelines at: https://www.fanniemae.com/content/guide/selling/b3... titled: B3-6-02: Debt-to-Income Ratios (09/29/2015)

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There is a specific section addressing this topic:

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Calculating Total Monthly Obligation

The total monthly obligation is the sum of the following:

  • the monthly housing expense of the borrower's principal residence (or the qualifying payment amount if the subject mortgage loan is secured by the borrower's principal residence (see B3-6-03, Monthly Housing Expense));
  • the qualifying payment amount if the subject mortgage loan is secured by a second home or investment property (see B3-6-04, Qualifying Payment Requirements);
  • monthly payments on installment debts and other mortgage debts that extend beyond ten months;
  • monthly payments on installment debts and other mortgage debts that extend ten months or less if the payments significantly affect the borrower
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Shaun Weekes
Loan Officer / Processor / Life & Health Agent · Rancho Cucamonga, CA · Member since 2014 · 1k+ posts · 757 votes
10y

If you have a credit card that has a zero balance and the credit limit is 10,000 or whatever this will not affect your DTI.

DTI is based on payments not your debt.

Fannie Mae used to make you close your c.c. account if it was being paid off through the loan. They recently changed this and now the account doesn't need to be paid off.

Example on DTI

Mr. Jones makes 10,000 a month gross and is a wage earner. He has the following debts:

Capital one card: Balance $10,756 Payment $202

Ford Motor Credit: Balance $33,987 Payment $309

H.E.L.O.C.: Balance $90,000 Total that can be drawn $100,000 (in this case the UW will calculate the payment based on $100,000) PAYMENT 400

New First Mortgage: $200,000 Payment $1500 (Including taxes and insurance)

Total DEBT: 344, 743 Total PAYMENTS: 2,411

In this case the DTI will be 5.11/24.11 now during the refinance you don't want to use any c.c's because it could affect your DU/LP findings. This is why good loan officers tell you not to buy, co sign or use any credit cards and if you can avoid using any reserves.

Just as a side not I think DTI ( debt to income ratio ) should be changed to PTI ( payments to income ratio)

I hope this helps and I speak about this briefly in my interview on the Joe Fairless Show earlier this year. The link is on my profile.

Have a great day.  

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  • Charlie Fitzgerald
    Lender · Las Vegas, NV · Member since 2015 · 2k+ posts · 1k+ votes
    10y

    Most lenders will have you freeze the lines at whatever point your dti will cover...

    0Reply
  • Brian Gibbons
    Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
    10y

    @Nicholas B.

    it's so confusing today about DTI

    You have a consumer protection bureau CFPB and Dodd Frank on one side and mortgage origination people on the other

    I heard recently about this poor woman who had 20% down and DTI at 45%

    She had been on her job for 15 years, same house for 10 years, and had open accounts with zero balances, but the credit lines pushed her DTI up, she was not approved for her mortgage

    IMHO Credit lines are not debt

    But whatever Dodd Frank says goes, and the CFPB is the sheriff in town

    2Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    10y

    Im not too sure about that exactly...but I can tell you that credit cards that do not have a limit can hurt your credit. Since there is no preset spending limit, the reported limit on your credit report will show what ever you balance is, thus it will appear that you are at 100% utilization on that card, which is not in actuality true. I had one of these cards and actually asked them to change it over to a card with a credit limit.

    [email protected]301-893-4635Podcast Guest on Show #192
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    2Reply
  • Nicholas B.
    OP
    Finance, Credit, and Insurance · Northwestern, PA · Member since 2015 · 56 posts · 20 votes
    10y
    Originally posted by @Charlie Fitzgerald:

    Most lenders will have you freeze the lines at whatever point your dti will cover...

     Hi Charlie, I respect that you are a Private Money Lender and rightfully have a subjective opinion. I should have clarified that I was speaking specifically of conventional lending. 

    Do you have any citation of evidence of this? Or experience with conventional lenders using this method since the big credit reform after the meltdown?

    0Reply
  • Nicholas B.
    OP
    Finance, Credit, and Insurance · Northwestern, PA · Member since 2015 · 56 posts · 20 votes
    10y
    Originally posted by @Russell Brazil:

    Im not too sure about that exactly...but I can tell you that credit cards that do not have a limit can hurt your credit. Since there is no preset spending limit, the reported limit on your credit report will show what ever you balance is, thus it will appear that you are at 100% utilization on that card, which is not in actuality true. I had one of these cards and actually asked them to change it over to a card with a credit limit.

     Interesting, Russell. I've never came across that on thousands of bureau reports that I've seen. I personally have a couple of "flexible spending cards", but they still have limits on paper (and on my credit report). What a mess that would be otherwise, though! 

    0Reply
  • Charlie Fitzgerald
    Lender · Las Vegas, NV · Member since 2015 · 2k+ posts · 1k+ votes
    10y

    I've also been a conventional lender, mortgage banker, and mortgage broker for almost 25 years. I've never seen a conventional underwriter allow a borrower to leave open a credit line at a level above which by the borrower choosing to access the available credit would mean they would then be outside of that lenders guidelines for DTI. Some will even make them close the line completely. At a minimum, they will require them to freeze the line at a level that will keep them within their DTI requirements. All lenders will have their own guidelines and overlays to Fannie/Freddie guidelines. The lender loaning the money can make their own requirements stricter than Fannie/Freddie's.

    1Reply
  • Brian H.
    Rental Property Investor · Huntsville, UT · Member since 2012 · 127 posts · 35 votes
    10y
    Originally posted by @Brian Gibbons:

    @Nicholas B.

    IMHO Credit lines are not debt

    And, if you want a good credit score, it helps to have a relatively high amount of available credit.

    0Reply
  • Nnabuenyi Anigbogu
    Chicago, IL · Member since 2015 · 298 posts · 261 votes
    10y

    @Charlie Fitzgerald If i understand correctly you are saying that lender will make you freeze your credit line if accessing it would put you above the lenders DTI limits. Im my opinion this only applies if a lender has very strict overlays. I doubt it is a fannie guideline (i could be wrong though.

    The reason i say this is because my last two conventional loans would not have gone through if this was the case. For both i was around 44% in terms of DTI. My outstanding unused lines of credit total over 150K (multiple cards). If those were counted in any way i would immediately be above the DTI level. And i was not required to freeze any lines. The only thing that counted was the approx 5K balance owed one of the cards.

    0Reply
  • Nicholas B.
    OP
    Finance, Credit, and Insurance · Northwestern, PA · Member since 2015 · 56 posts · 20 votes
    10y

    @Charlie Fitzgerald, do you have any experiences like that since Dodd Frank?

    I've been told by vets in this industry that at one time it was common to demand closure of open accounts. I've only been doing this since 2008 and understand that a lot has changed since then. I've personally worked with several lenders on mortgage refinances while having well over $100,000 of available credit with no mention of it. 

    I can't find any specific text in any compliance manuals addressing this. Here is CFPB's compliance guide. It covers DTI guidelines in detail , but makes no mention of available revolving credit.

    0Reply
  • Shaun Weekes
    Loan Officer / Processor / Life & Health Agent · Rancho Cucamonga, CA · Member since 2014 · 1k+ posts · 757 votes
    10y

    If you have a credit card that has a zero balance and the credit limit is 10,000 or whatever this will not affect your DTI.

    DTI is based on payments not your debt.

    Fannie Mae used to make you close your c.c. account if it was being paid off through the loan. They recently changed this and now the account doesn't need to be paid off.

    Example on DTI

    Mr. Jones makes 10,000 a month gross and is a wage earner. He has the following debts:

    Capital one card: Balance $10,756 Payment $202

    Ford Motor Credit: Balance $33,987 Payment $309

    H.E.L.O.C.: Balance $90,000 Total that can be drawn $100,000 (in this case the UW will calculate the payment based on $100,000) PAYMENT 400

    New First Mortgage: $200,000 Payment $1500 (Including taxes and insurance)

    Total DEBT: 344, 743 Total PAYMENTS: 2,411

    In this case the DTI will be 5.11/24.11 now during the refinance you don't want to use any c.c's because it could affect your DU/LP findings. This is why good loan officers tell you not to buy, co sign or use any credit cards and if you can avoid using any reserves.

    Just as a side not I think DTI ( debt to income ratio ) should be changed to PTI ( payments to income ratio)

    I hope this helps and I speak about this briefly in my interview on the Joe Fairless Show earlier this year. The link is on my profile.

    Have a great day.  

    3Reply
  • Charlie Fitzgerald
    Lender · Las Vegas, NV · Member since 2015 · 2k+ posts · 1k+ votes
    10y

    Yes. Before, during, and after 2008. The distinction is that credit card debt does not have a secured interest in the property, whereas HELOC debt does. It's a 2 edged sword...one hurdle is DTI and the other is with the HELOC staying in place, the holder of the HELOC is going to subordinate their Jr. lien to the new 1st lien Sr. Lien. They are not going to do that and leave the line intact with additional capital access.

    0Reply
  • Nicholas B.
    OP
    Finance, Credit, and Insurance · Northwestern, PA · Member since 2015 · 56 posts · 20 votes
    10y

    The original topic was specific to credit card debt, but a HELOC is a good subject to bring into the discussion, Charlie.

    If that's the case, doesn't it really come down to a LTV issue? The lender's not looking at what your potential payment per month may be (as in a DTI calculation), but the overall loan to value picture.

    I can say that it is possible to leave a 2nd lienholder in place while refinancing the primary mortgage because I've done it. They based the loan to value on the new mortgage only. At the time, they would not let me finance in the 2nd lien because it would have put me over their max LTV, but they left it intact. To be clear, this was an installment HEL and not a line of credit, so there may be a distinction there and it may depend on the lender.

    Are you saying that you do not have experience with any such problems with Credit Card availability, but you do in home equity products?

    0Reply
  • Nicholas B.
    OP
    Finance, Credit, and Insurance · Northwestern, PA · Member since 2015 · 56 posts · 20 votes
    10y
    Originally posted by @Shaun Weekes:

    If you have a credit card that has a zero balance and the credit limit is 10,000 or whatever this will not affect your DTI.

    DTI is based on payments not your debt.

    Fannie Mae used to make you close your c.c. account if it was being paid off through the loan. They recently changed this and now the account doesn't need to be paid off.

    Example on DTI

    Mr. Jones makes 10,000 a month gross and is a wage earner. He has the following debts:

    Capital one card: Balance $10,756 Payment $202

    Ford Motor Credit: Balance $33,987 Payment $309

    H.E.L.O.C.: Balance $90,000 Total that can be drawn $100,000 (in this case the UW will calculate the payment based on $100,000) PAYMENT 400

    New First Mortgage: $200,000 Payment $1500 (Including taxes and insurance)

    Total DEBT: 344, 743 Total PAYMENTS: 2,411

    In this case the DTI will be 5.11/24.11 now during the refinance you don't want to use any c.c's because it could affect your DU/LP findings. This is why good loan officers tell you not to buy, co sign or use any credit cards and if you can avoid using any reserves.

    Just as a side not I think DTI ( debt to income ratio ) should be changed to PTI ( payments to income ratio)

    I hope this helps and I speak about this briefly in my interview on the Joe Fairless Show earlier this year. The link is on my profile.

    Have a great day.  

    So you're saying that for a HELOC, your experience is that the payment will be calculated as the maximum payment as if the line was maxed out? How does that work when rates are variable and payments can fluctuate? What if Prime jumps throughout the application process?

    I understand that payments can vary on any variable rate loans. I think that's loosely addressed in the compliance manuals and it leaves it to the discretion of the lender as long as DTI fit on the initial application. I'm just wondering what your experience was with this?

    0Reply
  • Shaun Weekes
    Loan Officer / Processor / Life & Health Agent · Rancho Cucamonga, CA · Member since 2014 · 1k+ posts · 757 votes
    10y

    @Nicholas B.

    This is a great question.  Fortunately the feds haven't moved their rate since 08 I believe so the UW will just go off of the latest payment coupon.

    Janet Yellen has hinted strongly in raising rates as early as this month or December but only time will tell.  

    If it increased throughout the loan they would go off of the application date.  

    0Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    10y

    I think Charlie nailed it. 

    Nicholas, you have in your sig. line,  finance, credit and insurance, mind saying exactly what it is you do? I'm just guessing consumer lending. And, when asked what bank or company you work for, there is no secret there nor is it considered advertising on BP, so, for example, if you run a shop at Household Finance, or Quicken Mortgage, or ABC Bank, or the finance department at a car or MH dealership, you can say so. So, who do you do loans with? 

    Dodd-Frank has not taken away prudent lending practices, consistency is the key. 

    The interpretation of open credit with respect to the guidelines is as Charlie mentioned,  the example I gave as to the computation is simply a common overlay, not a rule, but prudent in mortgage lending, also commercial lending.

    We also like to see the use of cash, use of credit, there is still a lot of flexibility for a lender to forecast perceived risks. The basic rule is fair and consistent underwriting, if it's not you open the doors to predatory lending. 

    Debating the art of underwriting isn't a good way to build credibility on BP, giving good advice is, so I'll leave you to your debating. When bad advice is given, I usually say something, IMO. Haven't seen any, just an opinion. :)

    Oh, edited:

    How do we calculate debt with an adjustable rate of interest? You can use the current rate or the go up to the margin for the next adjustment or, some even use the ceiling rate depending on the loan, it's an overlay. :)

    0Reply
  • Lynn McGeein
    Real Estate Agent · Virginia Beach, VA · Member since 2012 · 2k+ posts · 1k+ votes
    10y

    In our recent loan qualification process, we came across this as an update to Fannie guidelines:

    "Payoff of Revolving Debt at or Prior to Closing When a revolving account is being paid off at or prior to closing, the current policy requires lenders to document that the revolving account has also been closed in order to exclude the payment from the debt-toincome (DTI) ratio. The Selling Guide has been updated to remove the requirement that the revolving account be closed. Going forward, revolving accounts that are paid down to zero at closing may remain open and no monthly payment needs to be included in the DTI ratio. Updated Selling Guide Topics  B3-6-02, Debt-to-Income Ratios (DTI Ratios, Calculating Total Monthly Obligation,)  B3-6-07, Debts Paid Off At or Prior to Closing (Payoff or Paydown of Debt for Qualification) Effective Date This policy change is effective immediately. Desktop Underwriter® (DU®) currently issues a message stating that revolving debts must be included in the total expense payment if the account is not being closed. Lenders may disregard this message until it is removed in a DU release later in 2015."

    In addition, we were happily surprised to learn that if you take a loan on your 401(k), that payment is not calculated as part of your DTI ratio.

    3Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    10y
    Originally posted by @Lynn McGeein:

    In our recent loan qualification process, we came across this as an update to Fannie guidelines:

    "Payoff of Revolving Debt at or Prior to Closing When a revolving account is being paid off at or prior to closing, the current policy requires lenders to document that the revolving account has also been closed in order to exclude the payment from the debt-toincome (DTI) ratio. The Selling Guide has been updated to remove the requirement that the revolving account be closed. Going forward, revolving accounts that are paid down to zero at closing may remain open and no monthly payment needs to be included in the DTI ratio. Updated Selling Guide Topics  B3-6-02, Debt-to-Income Ratios (DTI Ratios, Calculating Total Monthly Obligation,)  B3-6-07, Debts Paid Off At or Prior to Closing (Payoff or Paydown of Debt for Qualification) Effective Date This policy change is effective immediately. Desktop Underwriter® (DU®) currently issues a message stating that revolving debts must be included in the total expense payment if the account is not being closed. Lenders may disregard this message until it is removed in a DU release later in 2015."

    In addition, we were happily surprised to learn that if you take a loan on your 401(k), that payment is not calculated as part of your DTI ratio.

    Okay, I'll buy all that, I was told I'm busier than a one legged field goal kicker in triple over time. I've been doing tons of research lately and that means catching up on recent changes, this stuff is always changing. 

    However, that is under DU, doesn't mean a lender can't underwrite to more strict standards, fairly and consistently. :) 

    1Reply
  • Lynn McGeein
    Real Estate Agent · Virginia Beach, VA · Member since 2012 · 2k+ posts · 1k+ votes
    10y

    This link was informative -- says published Sept 29 2015, Monthly Debt Obligations

    https://www.fanniemae.com/content/guide/selling/b3/6/05.html#Loans.20Secured.20by.20Financial.20Assets

    1Reply
  • Ben Leybovich
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    10y
    Originally posted by @Brian Gibbons:

    @Nicholas B.

    it's so confusing today about DTI

    You have a consumer protection bureau CFPB and Dodd Frank on one side and mortgage origination people on the other

    I heard recently about this poor woman who had 20% down and DTI at 45%

    She had been on her job for 15 years, same house for 10 years, and had open accounts with zero balances, but the credit lines pushed her DTI up, she was not approved for her mortgage

    IMHO Credit lines are not debt

    But whatever Dodd Frank says goes, and the CFPB is the sheriff in town

     Brian - I would take the CFPB side on this. Credit lines to most people in America are not the same thing as to you and me. $10,000 of available credit can become $7,000 of actual debt in 30 minutes. Presumption that it will, at least to a certain extent, is the correct presumption in my opinion.

    Commercial revolving credit lines are obviously a different matter all together. But, those don't fall under DF and are not policed by the CFPB.

    1Reply
  • Brian Gibbons
    Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
    10y
    Originally posted by @Ben Leybovich:
    Originally posted by @Brian Gibbons:

    @Nicholas B.

    it's so confusing today about DTI

    You have a consumer protection bureau CFPB and Dodd Frank on one side and mortgage origination people on the other

    I heard recently about this poor woman who had 20% down and DTI at 45%

    She had been on her job for 15 years, same house for 10 years, and had open accounts with zero balances, but the credit lines pushed her DTI up, she was not approved for her mortgage

    IMHO Credit lines are not debt

    But whatever Dodd Frank says goes, and the CFPB is the sheriff in town

     Brian - I would take the CFPB side on this. Credit lines to most people in America are not the same thing as to you and me. $10,000 of available credit can become $7,000 of actual debt in 30 minutes. Presumption that it will, at least to a certain extent, is the correct presumption in my opinion.

    Commercial revolving credit lines are obviously a different matter all together. But, those don't fall under DF and are not policed by the CFPB.

     Totally agree Ben :)  Commercial lending does not equal residential lending.

    0Reply
  • Nicholas B.
    OP
    Finance, Credit, and Insurance · Northwestern, PA · Member since 2015 · 56 posts · 20 votes
    10y
    Originally posted by @Bill Gulley:

    I think Charlie nailed it. 

    Nicholas, you have in your sig. line,  finance, credit and insurance, mind saying exactly what it is you do? I'm just guessing consumer lending. And, when asked what bank or company you work for, there is no secret there nor is it considered advertising on BP, so, for example, if you run a shop at Household Finance, or Quicken Mortgage, or ABC Bank, or the finance department at a car or MH dealership, you can say so. So, who do you do loans with? 

    Dodd-Frank has not taken away prudent lending practices, consistency is the key. 

    The interpretation of open credit with respect to the guidelines is as Charlie mentioned,  the example I gave as to the computation is simply a common overlay, not a rule, but prudent in mortgage lending, also commercial lending.

    We also like to see the use of cash, use of credit, there is still a lot of flexibility for a lender to forecast perceived risks. The basic rule is fair and consistent underwriting, if it's not you open the doors to predatory lending. 

    Debating the art of underwriting isn't a good way to build credibility on BP, giving good advice is, so I'll leave you to your debating. When bad advice is given, I usually say something, IMO. Haven't seen any, just an opinion. :)

    Oh, edited:

    How do we calculate debt with an adjustable rate of interest? You can use the current rate or the go up to the margin for the next adjustment or, some even use the ceiling rate depending on the loan, it's an overlay. :)

     Hi Bill. First thank you for taking time out of your busy schedule to chime in. I'll answer your question in that I am in consumer lending but would prefer anonymity beyond that. I respect that many are here to build credibility and relationships. I'm not. 

    I'll also clarify my position on this -I've seen credit scores damaged by people closing credit lines that they should not because of this exact type of advice.

    I don't think Charlie nailed it. Blanket statements like that are not incontestable and can be misleading.  And a statement like this is likely to be interpreted as fact, not opinion:

    You can check fannie mae underwriting, if a credit card has a zero balance, and that account is still open, half the high credit amount that had been used is used to compute debt ratios. High credit outstanding within a year, say $5,000.00, at application it has a zero balance, say terms of that card are 3% of balance out standing, then it would be:

    $2500 x 3% = $75.00 payment computed to the debt ratio.

    In taking the time to check the underwriting guidelines, I've found that there is no such wording and nobody else has produced a citation indicating truth to this concept either. An individual lender could make a decision to treat all credit cards that way, but that would also be a conscience decision to decline many otherwise well qualified applicants. There's no evidence suggesting that its the norm.

    @Charlie Fitzgerald saying "Most lenders will have you freeze the lines at whatever point your dti will cover..." is just plain confusing. Freezing a credit line is a fraud prevention technique and possibly a self discipline technique. It has no application to credit limits at all, let along any relationship to Debt to Income that I can follow. Again, a specific lender may, but you're telling everybody here that this is a standard. *citation

    I'll back this with data.

    FHA posts their DTI guidelines here -  no mention of any revolving debt in the calculation.

    Quicken Loans explains their FNMA Guidelines for DTI here - The specify "Credit card payment (from amounts owed)" and "The monthly payments figured in are also the absolute minimum payment amounts, so if you pay extra every month, that amount would not be figured into this ratio."

    Bank of America explains DTI here -  no mention. They even have a handy little worksheet here.

    Wells Fargo explains DTI here - again stating "Credit card payments (use the minimum payment)".

    The list goes on and on. Granted, they don't publish their proprietary underwriting guidelines, but are they really going to offer consumers ways to check their qualifications just to get them in the door and then decline them based on available credit? My attorney would probably advice it would be dancing dangerously close to a deceptive advertising practice. Considering that the FTC and CFPB actually have a cooperation agreement, I'd venture that major lenders tread very cautiously in that territory.

    Nothing personal, guys. It's just that people are coming here for good advice and unfortunately, sometimes bad (or in this case, probably just outdated) advice is given with great intentions. Most people probably won't read all of this anyway :)

    0Reply
  • Charlie Fitzgerald
    Lender · Las Vegas, NV · Member since 2015 · 2k+ posts · 1k+ votes
    10y

    The treatment of revolving credit card debt and the treatment of secured installment debt are vastly different in terms of underwriting guidelines, practices and residential lending best practices - and different again in most cases, for each lender.  Fannie Mae and Freddie Mac have established general guidelines.  Nothing keeps a lender from choosing to adopt their own guidelines and standards and overlays that are more strict.  They can also apply guidelines, standards and overlays that are less strict.  In those cases, their loan made may not be deliverable to Fannie Mae/Freddie Mac. Nobody posting to this thread yet has said anything incongruent with past and present lending practices. The issue here is that there are not standardized "look it up in the book" answers to this topic.  Lending institutions have their own operating policies and procedures for loaning their money based on their perception of what is prudent (for them) and what is not.  That means there are at least as many answers to the original question (s) as there are lenders.

    1Reply
  • Nicholas B.
    OP
    Finance, Credit, and Insurance · Northwestern, PA · Member since 2015 · 56 posts · 20 votes
    10y
    Originally posted by @Charlie Fitzgerald:

    The treatment of revolving credit card debt and the treatment of secured installment debt are vastly different in terms of underwriting guidelines, practices and residential lending best practices - and different again in most cases, for each lender.  Fannie Mae and Freddie Mac have established general guidelines.  Nothing keeps a lender from choosing to adopt their own guidelines and standards and overlays that are more strict.  They can also apply guidelines, standards and overlays that are less strict.  In those cases, their loan made may not be deliverable to Fannie Mae/Freddie Mac. Nobody posting to this thread yet has said anything incongruent with past and present lending practices. The issue here is that there are not standardized "look it up in the book" answers to this topic.  Lending institutions have their own operating policies and procedures for loaning their money based on their perception of what is prudent (for them) and what is not.  That means there are at least as many answers to the original question (s) as there are lenders.

     I know Charlie, but you said "Most lenders will...". Can you qualify that?

    0Reply
  • Nicholas B.
    OP
    Finance, Credit, and Insurance · Northwestern, PA · Member since 2015 · 56 posts · 20 votes
    10y
    Originally posted by @Lynn McGeein:

    This link was informative -- says published Sept 29 2015, Monthly Debt Obligations

    https://www.fanniemae.com/content/guide/selling/b3...

     The applicable section:

    Revolving Charge/Lines of Credit

    Revolving charge accounts and unsecured lines of credit are open-ended and should be treated as long-term debts and must be considered part of the borrower's recurring monthly debt obligations. These tradelines include credit cards, department store charge cards, and personal lines of credit. Equity lines of credit secured by real estate should be included in the housing expense.

    If the credit report does not show a required minimum payment amount and there is no supplemental documentation to support a payment of less than 5%, the lender must use 5% of the outstanding balance as the borrower's recurring monthly debt obligation.

    For DU loan casefiles, if a revolving debt is provided on the loan application without a monthly payment amount, DU will use the greater of $10 or 5% of the outstanding balance as the monthly payment when calculating the total debt-to-income ratio.

    So, they establish a way of determining a minimum payment if a balance appears. Thanks for the supplement.

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  • Charlie Fitzgerald
    Lender · Las Vegas, NV · Member since 2015 · 2k+ posts · 1k+ votes
    10y

    I don't know of any conventional lenders that will not adhere to the requirements that now require a lender to establish that every borrower has the capacity to repay the loan. The pragmatic lenders did this prior to Dodd-Frank requiring it. This assessment is based on a review of the income and expenses and the structure of the loan being sought. It's not JUST a DTI issue. It's DTI, LTV, CLTV (if there is a second lien..3rd lien etc.)

    When I used the phrase "most lenders will", I am referring to the practice of having a borrower freeze open credit lines (some refer to it as collapsing the line) ...., that is what they will require if at maximum extension of available credit, a borrower does not meet the capacity to repay test, due to DTI being too high. As another poster stated here, "a $10000 credit line can turn into $7000 of debt."

    1Reply
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