Heeding the call of some of the largest mortgage lenders in the industry, the Consumer Financial Protection Bureau (CFPB) is moving to back the elimination of debt-to-income (DTI) requirements in mortgage underwriting.
In a letter CFPB Director Kathy Kraninger sent to Congress today, the CFPB asked to amend the Ability to Repay/Qualified Mortgage rule (ATR/QM rule) in order to remove DTI as a qualifying factor in mortgage underwriting.
This rule was created in response to the financial crisis of a decade ago as a way to prevent lending money to borrowers who might not be able to afford the loan. The ATR/QM rules includes eight separate borrower qualifications that lenders must examine when approving a loan. The rule includes things like verification of income, credit history and DTI, among others. The only portion the CFPB is asking to amend is the DTI requirement as a powerful coalition of lenders deems the rule unfair and constraining.
In September, a group of lenders and industry groups, including Wells Fargo, Bank of America, Quicken Loans, Caliber Home Loans, the Mortgage Bankers Association, the American Bankers Association, the National Fair Housing Alliance, and others, sent a letter to the CFPB, asking the bureau to remove the 43 percent DTI requirement on both prime and near-prime loans.
One reason for the request is that GSEs Fannie Mae and Freddie Mac are not subject to this rule, under a condition called the “QM Patch.” This patch allows loans sold to Fannie and Freddie to exceed the 43 percent DTI requirement, which some lenders say is unfair for those loans backed by private capital.
The 43 percent DTI rule also doesn’t apply to government-insured loans such as FHA, VA or USDA mortgages.
The Risks of Eliminating DTI Requirements
During the height of the financial crisis, in 2008 and 2009, some 3 million foreclosures were filed each year. As a way to prevent another catastrophe, the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted, which created the CFPB.
Although the economy has recovered, some argue that easing important lending safeguards could pave the way for problems in the future.
“Eliminating debt-to-income ratios from underwriting guidelines will result in more loans to consumers with already heavy debt loads and is reminiscent of Congress requiring Fannie and Freddie to buy more subprime loans. That didn’t end well,” says Greg McBride, CFA, Bankrate chief financial analyst.
McBride says that the DTI requirement has long been a standard in borrowing, so removing it outright could mean a free-for-all in the mortgage lending space.
“The 43 percent DTI standard came about after the goal posts were moved from the previous, long-held standard of 36 percent,” McBride says. “Now they want to just take the goal posts off the field altogether.”
Although DTI is an important measure in determining a borrower’s ability to repay a loan, McBride points out, it’s important to understand what’s behind the number. For instance, two people might have the same DTI but a very different financial profile.
“Take two different borrowers, each with a 43 percent DTI,” McBride says. “One has a monthly income of $10,000 and the other just $4,000. The higher income borrower has $5,700 remaining after monthly debt obligations whereas the lower income borrower has just $2,280 left over. Through that lens, the lower income borrower might look riskier than a higher-income borrower with more financial wiggle room.”
When you're house hunting, the allure of new construction is undeniable. You get to be the first to live in the pristine home—one untouched by grimy hands or muddy shoes. It's full of brand-new appliances and the finishes and treatments that you picked to fit your aesthetic. And you won't have to worry about making any cosmetic or structural upgrades for years.
If you are interested in buying a new construction, the builder's agent will be ready to help you with the process. But make no mistake: You need your own real estate agent from the get-go. Even if it seems like plug and play to sign up with the builder's on-site agent, you're going to want someone representing your side of the deal.
What is a builder's agent?When you buy a new construction, the home's builder is considered the seller, and the agent representing the builder is called the builder's agent.
"The builder’s agent will always have the builder's best interest in mind,”
After all, the job of the builder's agent is to get the highest price for the homes the builder is selling so the agent is not going to be as eager to negotiate down.
Why you should hire your own real estate agent
It's a good idea to have your real estate agent accompany you on your first visit to the new construction. Why? Because the builder (aka the seller) will be responsible for paying the commission, and needs to know if you'll have a real estate agent representing you. So bringing your agent to the first visit will make it clear that the builder's agent will be on the hook for paying commission. Some builders might even refuse to pay your agent a commission if you don’t register the agent the first time you visit the home on a new construction site.
“Your real estate agent's job is to help you get the most value for your money, with the least hassle and frustration,” says Patrick Welsh, a real estate agent with Keller Williams, in Houston.
When buying new construction, here’s what your real estate agent will help you with that you might miss out on if you stick with the builder’s agent:
How the builder's agent can help youAll that said, the builder's agent can be a valuable resource for learning about your potential new home.
“They are knowledgeable about the construction and available amenities, as well as the housing development and general community vibe,” says Walgrave. You can rely on the builder's agent for background information—just don’t make this individual your sole point of contact on the buying and selling process.
Everyone wants to walk away from buying a home—whether it be a new construction or not—with peace of mind. Having a real estate agent in your corner will help facilitate that.