Debt to Income requirements should be a sliding scale

[oscar_actuary]

Hypothetically I'm shopping for a mortgage

Say I gross $4000 / month.  Then the bank will slap some percent on that and prequalify me for some amount

Now, say I introduce my Wife's income from a job she has had for 10 yrs.  Why won't the bank consider that we could use 100% of that for the Mortgage.  I mean, the bank peresumes we are living on $4k a month, so why would we need to hold back 70% of my wife's income?

The only explanation that now pops in my head is the risk of that job going away.  Ok, so, hit it with some risk factor, like 85%.  Not 28%.  I figure the 28% is there to account for other costs the lendee will incur - like eating.  Why cap this extra stream of income the exact same way?

To extend that to general cases, I think the 28% (lets just stick with the lower ratio for this demonstration) should only apply to the first $N (maybe based on the number of dependents) while for anything above $N, you can use 85% towards the mortgage.

Ex hypothetical

Household   $N

1                   $40,000

2                   $65,000

4                   $100,000

so, if you are a family of 4 making $130k, you can qualify using: 0.28 * 100k / 12 + 0.85 * 30k / 12 towards mortgage, instead of just 28% of $130k / 12

I understand that the 28% standard may have to be lowered to rescale the average loan to income; but in general the point I am making is that when you are making more money you should not have all of your income subjected to the same limits.  There are many costs in life that will not go up proportionally with income, some reverse-sliding scale should be used, imo

Crazy?

[StartingOver10]

First of all, the lenders don't use 28% in the fashion you describe.

Secondly, the ratio's that are used as a maximum (which is no where near 28%) are those that Fannie and Freddie allow per their guidelines to purchase the loan.

The lender only has to follow those guidelines for the loans they plan to deliver to Fannie Mae and Freddie Mac.

The lender can keep any loan in their own portfolio that does not follow those guidelines.

Of course, most lenders need the money from the sale to Fannie and Freddie to keep the cycle of lending moving.

As an aside, there are all kinds of guidelines that can be pushed, on the lender side, with compensating factors. Such compensating factors include larger reserves or larger down payments.

Lastly, remember the ratios are calculated on gross income, not net income. The other expenses not included when calculating your debt ratios is handled by the remaining percentage.

Taking a 100% of the second borrowers income to allow toward financing would be risky indeed as that second borrower doesn't even bring home 100%.  

I understand your question, but the whole ratio issue is just a risk factor too. How much income should be alloted to housing? It is currently much more than 28%, but much less than 100% and you won't ever see "all lenders" accept the same number. The guidelines are just that and the absolute maximums are just what the purchasers of the newly originated loans will accept for purchase.

If you are looking for exceptions, either find another lender whose guidelines more closely aligns with Fannie and Freddies maximums or find a portfolio lender. They are out there.

[oscar_actuary]

I am under the impression than lenders use 28-36% for the front end and 36-42+% for the back end, with some wiggle room on both.

I should have used a lower number that 85%, of course, due to taxes.  Lets say 60% of the additonal income can go towards the Debts. 

Without getting bogged down in semantics or the actual ratios utilized, it would make sense to consider that above a certain income, ones marginal ability to afford a higher mortgage increases.  Your first dollars go to food, shelter, utilities, etc.  If I made $1,000,000 /yr, I don't need the same percent of my income to cover non-debts as a guy making $26,000, presuming we both have 3 dependents, as an example.

maybe it's just me

[tooleman694]

Yes it is true, once you get to the higher income range you have a lot more extra cash sitting around. I agree it is cool to push the ratios once your income is high.

[StartingOver10]

Depends on the loan and also the lender as to the maximum allowed.

FHA has a front end maximum of 45.99% and a back end of 56.99%

Conventional is less.

Those are pretty hefty maximums IMO.

You are right - as your HH income increases there is more left over after the basics are taken care of....but once you get to a higher income there are more toys too

[oscar_actuary]

tru dat