Credit Card Center Advertiser Disclosure

Reply
Established Member
Posts: 17
Registered: ‎01-26-2016
0

High Credit Lines and DTI Calculation

Reading the How much total credit line do people really get compared to their income? thread made me remember a post on this forum regarding high credit limits and how lenders calculate the debt in DTI calculations.  (Can't find the post at the moment)

 

What was stated is that the lenders will/can(?) calculate what the minimum payment would be for every individual revolving credit line when at 100% utilization.  For those with very high credit lines that would add substantially to the backend DTI calculation - even though they keep the ACTUAL utilization low or at zero!

 

I did find an a site that did allude to this behavior:

 

http://homeguides.sfgate.com/good-high-credit-card-limits-applying-mortgage-72263.html

 

"When a lender takes a look at your credit report and sees credit cards with high limits, they take into consideration what your debt-to-income ratio would be if you were to max

out those cards after the mortgage has been granted."

 

I PIF before statement close (except for one account) for max score - but with a total credit line over 100K - I am wondering if I should consider asking the creditors to reduce my credit lines?

 

My selfish question (as I plan to be attempting to get a mortgage in a few months) - How common/prevalent is this method of DTI calculation for a lender?

 

Frequent Contributor
Posts: 315
Registered: ‎09-15-2016
0

Re: High Credit Lines and DTI Calculation

[ Edited ]

I am curious to hear what more knowledgeable folks have to say on this.  It is my understanding that DTI was based on what you currently owe, not what you MIGHT owe. 

FICO08 7/7/17 EQ-767, TU-770, EX-761
Gardening unit sometime in 2018
Community Leader
Senior Contributor
Posts: 4,240
Registered: ‎07-17-2014
0

Re: High Credit Lines and DTI Calculation

I am also interested in hearing what knowledgeable people say about this, especially mortgage loan officers who are familiar with what their colleagues and competitors in the industry do.

 

It has always seemed to me, intuitively, that if a person has a total credit limit of 300k (at < 1% utilization) and an annual salary of 100k, that vast untapped CC limit could be considered a source of risk to the lender later.  (The homeowner runs up a lot of CC debt and then due to extremely high interest starts missing mortgage payments.)

 

I'm not saying that mortgage lenders do view it that way, but it certainly seems plausible that some might.  Nontheless in the world of credit intuition can suggest something that is in fact never true.  So like the OP I'd like to hear more from people who really know.

 

If our OP doesn't get many responses here I suggest he repost this question in the mortgage forum.  There are a lot of loan officers who visit it.  Bear in mind that cross posting is normally sharply discouraged here, but the mods will likely take a lenient view if you have given a particular forum some time and are getting few responses.  Or better yet, they might move your thread at your request.

Valued Contributor
Posts: 2,064
Registered: ‎04-01-2015
0

Re: High Credit Lines and DTI Calculation


Myrwyn wrote:

I am curious to hear what more knowledgeable folks have to say on this.  It is my understanding that DTI was based on what you currently owe, not what you MIGHT owe. 


Actually DTI is not based on what you currently owe strictly speaking.

 

The "front ratio" DTI is the percentage of your monthly gross income (before taxes) that is used to pay your housing costs, including principal, interest, taxes, insurance, mortgage insurance (when applicable) and homeowners association fees (when applicable).  My understanding is "back ratio" DTI also includes all monthly consumer debt payment obligations (a recurring annual debt would need to be converted to a monthly basis)

 

With respect to credit card debt, the obligation is based on the sum total of minimum payments for revolving accounts. For charge cards with one month terms the obligation is the total amount owed that month. The obligation on installment loans is the monthly installment payment. Other payment obligations include property taxes and utility bills. Insurance is not considered a debt and would not be included.

 

As mentioned above, some recurring payment obligations are not monthly or "currently owed" but occur quarterly, twice a year or yearly. Those will need to be converted to a monthly basis and included in the calculation

Fico 8: .......EQ 850 TU 850 EX 850 (3/2017)
Fico 9: .......EQ 850 TU 850 EX 850 (3/2017)
Fico 4 .....:. EQ 804 TU 823 EX 830 (3/2017) EX Fico 98: 839 (3/2017)
VS 3.0:...... EQ 832 TU 832 EX 832 (3/2017)
Fico 8 BC:. EQ 887 TU 899 EX 900 (3/2017)
CBIS: ........LN Auto 940 LN Home 870 TU Auto 902 TU Home 950 (4/2017)
Established Member
Posts: 17
Registered: ‎01-26-2016
0

Re: High Credit Lines and DTI Calculation

[ Edited ]

Thomas_Thumb wrote:

Myrwyn wrote:

I am curious to hear what more knowledgeable folks have to say on this.  It is my understanding that DTI was based on what you currently owe, not what you MIGHT owe. 


Actually DTI is not based on what you currently owe strictly speaking.

 

The "front ratio" DTI is the percentage of your monthly gross income (before taxes) that is used to pay your housing costs, including principal, interest, taxes, insurance, mortgage insurance (when applicable) and homeowners association fees (when applicable).  My understanding is "back ratio" DTI also includes all monthly consumer debt payment obligations (a recurring annual debt would need to be converted to a monthly basis)

 

With respect to credit card debt, the obligation is based on the sum total of minimum payments for revolving accounts. For charge cards with one month terms the obligation is the total amount owed that month. The obligation on installment loans is the monthly installment payment. Other payment obligations include property taxes and utility bills. Insurance is not considered a debt and would not be included.

 

As mentioned above, some recurring payment obligations are not monthly or "currently owed" but occur quarterly, twice a year or yearly. Those will need to be converted to a monthly basis and included in the calculation


TT - Most people seem to understand that your non-housing debts (student loans, car loans, ACTUAL CC debt) will get figured into the back end or back ratio monthly DTI calculation regardless how/when you are billed for it.

 

However that is not what I am referring to.

 

I am talking about lenders estimating the maximum possible minimum payment per credit line (i.e. the credit line at 100% utilization) and adding it to the debt part of the back ratio of the DTI calculation regardless whether you have used ANY of the credit line at all ( i.e. your 'sock drawer' credit card).

 

A quick search for the percentage a CC lender uses to calculate the minimum payment - reveals that Chase charges up to 2% of the total balance for the minimum payment.

 

If your prospective mortgage lender also uses 2% - and you have a total CL of $100K - that's $2000 added to debt in the back ratio DTI calculation!

 

Most information I've read indicate that lenders do NOT use this method for calculating back ratio/back-end DTI ---- however the sfgate.com link in my original post and other posts I've seen on various boards on the net warn prospective mortgage lendees about high credit lines due to this 'alternate' calculation method.

 

There are many people on this board that seek the highest CL possible - even though they don't have any plan on actually using it (I am somewhat guilty of this Smiley Happy )  I am wondering if they are jeopardizing approvals for major loans (or other negative ramifications) because of their high CL aspirations .

 

Was really hoping a LO/UW/etc would be able to give his/her expertise on this - as to if/when this is ever method is used?

 

Mods - Not sure that this is the right forum for this - but it seems to cross multiple credit types (CC, Mortgage, even Auto could apply) so I thought this would be the best forum for the topic. If there's a better forum for this topic - feel free to move it.

Valued Contributor
Posts: 2,064
Registered: ‎04-01-2015
0

Re: High Credit Lines and DTI Calculation

[ Edited ]

I see, you want to know if CL is a consideration regardless of whether any of the credit is used.

 

The three home mortgages DW and I took out over the years did not factor in some percentage of aggregate CL in DTI ratio. Our mortgages were through Wells Fargo a couple times and Bank of America most recently.

Fico 8: .......EQ 850 TU 850 EX 850 (3/2017)
Fico 9: .......EQ 850 TU 850 EX 850 (3/2017)
Fico 4 .....:. EQ 804 TU 823 EX 830 (3/2017) EX Fico 98: 839 (3/2017)
VS 3.0:...... EQ 832 TU 832 EX 832 (3/2017)
Fico 8 BC:. EQ 887 TU 899 EX 900 (3/2017)
CBIS: ........LN Auto 940 LN Home 870 TU Auto 902 TU Home 950 (4/2017)
Established Member
Posts: 17
Registered: ‎01-26-2016
0

Re: High Credit Lines and DTI Calculation

[ Edited ]

I did some more searching and found this article.  The author is a former manager at FICO and Experian.  The article suggests like the sfgate.com page is referring to outdated information but apparently some lenders (or just some of their LOs) are still doing this....

 

Myth: Too much available credit hurts home loan

 

 

Valued Contributor
Posts: 2,064
Registered: ‎04-01-2015
0

Re: High Credit Lines and DTI Calculation

As with Fico 8, the older Fico mortgage scores look at the following relative to credit cards:

1) Aggregate credit card utilization (all cards combined)

2) Number and/or percent of open cards reporting balances

3) Individual card utilization.

 

Neither Fico 8 nor the older Fico mortgage scores look at aggregate line of credit - only aggregate utilization. The Fico mortgage scores are more sensitive to a "high" % of cards reporting balances than is Fico 8. Thus, the recommendation to report a nominal balance on only 1 card each month, particularly for mortgage scores.

 

 

Fico 8: .......EQ 850 TU 850 EX 850 (3/2017)
Fico 9: .......EQ 850 TU 850 EX 850 (3/2017)
Fico 4 .....:. EQ 804 TU 823 EX 830 (3/2017) EX Fico 98: 839 (3/2017)
VS 3.0:...... EQ 832 TU 832 EX 832 (3/2017)
Fico 8 BC:. EQ 887 TU 899 EX 900 (3/2017)
CBIS: ........LN Auto 940 LN Home 870 TU Auto 902 TU Home 950 (4/2017)
Senior Contributor
Posts: 6,158
Registered: ‎04-11-2016
0

Re: High Credit Lines and DTI Calculation

I don't believe that mortgage lenders at this stage of the game really consider total (unused) credit limits.  If in the future they did, the easy work around would be for someone to slash their limits in half or as much as they felt was necessary.  It would only take a cycle to accomplish this and have the new limits report prior to apping.  It certainly would be a tough pill to swallow for many that spent years building up their limits, but obviously obtaining a mortgage would be paramount when weighing the options.  Fortunately IMO there is no need to worry about this issue, yet.

Forums posts are not provided or commissioned by FICO. Forums posts have not been reviewed, approved or otherwise endorsed by FICO. It is not FICO's responsibility to ensure all posts and/or questions are answered.

† Advertiser Disclosure: The listings that appear on myFICO are from companies from which myFICO receives compensation, which may impact how and where products appear on myFICO (including, for example, the order in which they appear). myFICO does not review or include all companies or all available products.
‡ Credit cards for FICO Score ranges: The score ranges are guidelines based on internal myFICO analysis of actual applicant approvals, and having a FICO Score in a particular range does not guarantee you will be approved for credit cards recommended in that range. These ranges were not provided by any card issuer.

* For complete information, see the terms and conditions on the credit card issuer’s website. Once you click apply for this card, you will be directed to the issuer’s website where you may review the terms and conditions of the card before applying. While myFICO always strives to present the most accurate information, we show a summary to help you choose a product, not the full legal terms - and before applying you should understand the full terms of products as stated by the issuer itself.

Copyright ©2001-2015 Fair Isaac Corporation. All rights reserved.   | Terms of Use | Privacy Policy | Sitemap

IMPORTANT INFORMATION: All FICO® Score products made available on myFICO.com include a FICO® Score 8, along with additional FICO® Score versions. Your lender or insurer may use a different FICO® Score than the versions you receive from myFICO, or another type of credit score altogether. Learn more

FICO, myFICO, Score Watch, The score lenders use, and The Score That Matters are trademarks or registered trademarks of Fair Isaac Corporation. Equifax Credit Report is a trademark of Equifax, Inc. and its affiliated companies. Many factors affect your FICO Score and the interest rates you may receive. Fair Isaac is not a credit repair organization as defined under federal or state law, including the Credit Repair Organizations Act. Fair Isaac does not provide "credit repair" services or advice or assistance regarding "rebuilding" or "improving" your credit record, credit history or credit rating. FTC's website on credit.