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Subject:  Re: Current Underwriting Standards? Date:  2/7/2014  1:03 AM
Author:  CCinOC Number:  126799 of 128866

I'm working with the understanding that Fannie / Freddie guidelines for a QM (Quality Mortgage) has a hard stop back end ratio of 43%. As you mention, non-QM loans held for investment allow for a higher DTI with compensating conditions. ~crackdclaw

If you get an "approve/eligible" at any DTI, a lender will accept it provided that the lender doesn't have an overlay. Most lenders are running scared per QM, so they usually have an overlay of 43%.


Because the QM rules are written in such ambiguous and convoluted language that no one knows which end is up. From the lender's POV, better to err on the side of caution at 43% than push what is perceived to be the envelope and be wrong. Here's the so called final rule language from Consumer Finance Protection Bureau. If you can make sense of it, you're a better (wo)man than I.


The final rule also establishes general underwriting criteria for qualified mortgages. Most importantly, the general rule requires that monthly payments be calculated based on the highest payment that will apply in the first five years of the loan and that the consumer have a total (or “back-end”) debt-to-income ratio that is less than or equal to 43 percent. The appendix to the rule details the calculation of debt-to-income for these purposes, drawing upon Federal Housing Administration guidelines for such calculations. […]

The Bureau also believes that there are many instances in which individual consumers can afford a debt-to-income ratio above 43 percent based on their particular circumstances, but that such loans are better evaluated on an individual basis under the ability-to-repay criteria rather than with a blanket presumption. In light of the fragile state of the mortgage market as a result of the recent mortgage crisis, however, the Bureau is concerned that creditors may initially be reluctant to make loans that are not qualified mortgages, even though they are responsibly underwritten. The final rule therefore provides for a second, temporary category of qualified mortgages that have more flexible underwriting requirements so long as they satisfy the general product feature prerequisites for a qualified mortgage and also satisfy the underwriting requirements of, and are therefore eligible to be purchased, guaranteed or insured by either (1) the GSEs while they operate under Federal conservatorship or receivership; or (2) the U.S. Department of Housing and Urban Development, Department of Veterans Affairs, or Department of Agriculture or Rural Housing Service. This temporary provision will phase out over time as the various Federal agencies issue their own qualified mortgage rules and if GSE conservatorship ends, and in any event after seven years [doesn't say seven years from when].

Here's how an underwriter answered my question about QM and DTI:

CC: Thanks for helping me with my question, which is… I thought, under the new QM rule, that the maximum DTI for conforming loans is 43%. However, someone told me that if DU or LP generates an approve/eligible finding, borrower’s DTI can exceed 43%; even go as high as 50%. Would you please confirm what the QM rule actually is with regard to DTI? I have two loans where the DTI exceeds 43% but every other lender I’ve asked has said 43% is absolute max, no matter what the AU findings are.

Response: CC, this is what our underwriters have told me: “[Lender's] conforming products are all FNMA/FHLMC or VA/FHA except for Jumbo [over $625,500]. These products are considered GSE/Agency products and are exempt from the 43% max DTI stated in QM rule until 2021 unless something changes before that. In other words, as long as you received DU approve/eligible, it is okay to have DTI exceeding 43%.”

Most lenders are not so brave.
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