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RE Groups Criticize Lenders’ Focus on Debt-to-Income Ratios

Realtors, bankers and builders issued a joint statement saying many factors should be used to determine a borrower’s risk of default – not just DTI ratios. “Credit history, cash reserves, property equity and liquid assets also help to paint a more complete picture.”

WASHINGTON – The National Association of Realtors, Mortgage Bankers Association, National Association of Home Builders and the American Bankers Association issued a joint statement about regulators’ “single-minded focus” on a mortgage qualification measure known as the debt-to-income ratio (DTI).

“The discussion on mortgage risk has been colored by a single-minded focus on just one factor that lenders use to examine a borrower’s likelihood to repay a mortgage: the debt-to-income ratio,” the letter said. “Yes, the DTI is important. But it is just one of many considerations lenders use in combination when evaluating whether a borrower can and will repay a loan.”

The importance placed on DTI should be more in line with other qualifications, the groups said.

“Other factors including credit history, cash reserves, property equity and liquid assets also help to paint a more complete picture of a borrower’s true credit profile and the true risks assumed by a lender,” they added.

The amount of cash a borrower has is a better indicator than DTI, the groups said. The average “front end” ratio, measuring income compared to the debt incurred by the new monthly mortgage payment, was 24% in September, according to Ellie Mae data. The average “back end” ratio, measuring all recurring debt including housing payments, stood at 37%.

At the start of the year, the average front end ratio was 26%, and the average back end ratio was 39%.

Source: HousingWire (10/22/19) Howley, Kathleen

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