Debt-To-Income Ratios…Does Anyone Care?

It seems we are still in a banking environment where no one cares about debt-to-income ratios (DTI), which is astonishing. Isn’t this one of the things that got us in trouble in the first place?

What’s the problem?

I have seen some FHA loans get approved with 50%-55% DTI. If you don’t know how the numbers work that may sound like a yawner to you. But let’s make it simple, between federal, state, local and social security taxes, the average worker gets 50% of his paycheck taken in taxes. If we only net 50% of our earnings, and another 50% goes toward servicing our debt including the new house we just bought, how will that person eat, pay for utilities, save for the future, travel, buy Christmas gifts, pay for insurance or a cell phone?

A real life example

I just had a potential new client who says he was pre-approved for a new mortgage as high as $350,000. When I ran the numbers I came up with a much lower figure, $250,000 is comfortable, $275,000 is a stretch, and $300,000 is out of bounds. I even went through and showed him how the numbers are computed, and how a $350,000 mortgage would leave him paying a little over half his gross income for his house payment and some other minor debt load he carried.

But since another bank (a large, reputable bank) has a loan officer that either does not know what they are doing, or plays fast and loose with his clients money, the potential client is confused. My numbers, logic and presentation don’t seem to convince him that at $350,000 he’d be biting off more than he can chew. So thanks to a loan officer that is still living in the early 2000’s, I will likely lose a client.

Have we learned?

How is it that we have suffered through the economic pain we have, and there are still people, banks and institutions like FHA who still don’t practice more realistic mortgage lending practices?

I can remember when the DTI was more rigid, and if you were spending over 36% of your gross income on a new house payment and your other debt, you had better have had some really strong compensating factors, like a lot of cash reserves, great credit, and a stable career path; and that may have only gotten you an allowance to go to 40%-41% on the DTI. Now it seems like we casually exceed that, and have not learned from the painful economic lessons of late.