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Mortgage Lenders Ignore The “28/36 Debt-To-Income Rule”

By Dan Green

The Incredible, Flexible, U.S. Mortgage Guidelines – Today's Mortgage and Real Estate News

Ellie Mae’s most recent Origination Insight Report shows today’s home buyers getting mortgage-approved despite higher-than-average debt-to-income ratios; Today’s mortgage rates and 5-day trends for conforming, FHA, VA, USDA, and jumbo and niche loans; The National Association of Home Builders reports an increase in the Housing Market Index, a survey of homebuilder confidence in the future of U.S. housing.

Mortgage Lenders Going Outside “Loan Rules”

Debt-to-income mortgage rules are flexible - Growella
Debt-to-income mortgage rules are flexible

Sometimes, the truth about mortgages turns out to be false. And, based on data from mortgage software company Ellie Mae, now is one those times.

Ellie Mae’s products help to approve millions of home loan applications annually, and its anonymized, closed-loan data shows that mortgage lenders are now looking past a long-standing rule in mortgage approval.

The “rule” is known as the 28/36 Rule.

The 28/36 Rule suggests that a home buyer’s mortgage approval is contingent on housing payments staying within 28 percent of the household income; and, total monthly obligations, inclusive of credit cards, car payments, staying within 36 percent of household income.

In mortgage parlance, this ratio of income to payments is known as the debt-to-income ratio , or DTI.

DTI is vital in mortgage lending because it measures disposable income and disposable income can help stave off foreclosure, which is an adverse outcome for everyone involved with the loan.

However, the 28/36 Rule isn’t something iron-clad and written into official mortgage guidelines. Mortgage lenders consider debt-to-income in their approval decisions, but they also consider other facets of an application.

Ellie Mae data shows how wrong the 28/36 Rule can be.

Data like this from Ellie Mae is the reason why most online mortgage calculators that purport to show “how much home you can afford” are worthless.

Those online calculators use a built-in 28/36 debt ratio to tell you what you can and cannot afford. There are no concessions made for real-world borrowing and the way mortgage lenders actually make an approval.

The best online mortgage calculators are flexible and responsive. They do a better job with the truth about mortgages and mortgage approvals.

And that truth is that you can’t know what you can get until you go to apply. So, get with a mortgage lender today and see what your debt-to-income ratio can help you afford to buy.

Today’s Mortgage Rates & Interest Rate Trends

Mortgage Rate Directions and Trends - Growella
Mortgage Rate Directions and 5-Day Trend

Mortgage rates are rising this Monday morning, complicating the process of shopping for today’s lowest mortgage rates.

Interest rates for all loan types are up.

Conventional mortgage rates for loans backed by Fannie Mae and Freddie Mac, and FHA mortgage rates for loans backed by the Federal Housing Administration are higher.

Same for VA mortgage rates for loans backed by the Department of Veterans Affairs and USDA mortgage rates for loans backed by the U.S. Department of Agriculture.

Rates for all products are higher as compared to Friday before the weekend.

The interest rate a lender quotes you will differ from the rate quoted to your neighbors, your colleagues, and your family members.

This is because a dozen loan traits determine your mortgage rates, including your loan size, credit history, state of residence, and your choice of loan program.

In general, VA and USDA loans get access to the lowest available mortgage rates. FHA and conventional rates are often higher.

You’ll also get higher rates when you talk to one mortgage lender only.

Statistics prove that home buyers save up to $2,000 by giving a mortgage application to a second loan officer; and, save even more by talking to a third.

Comparison shop to save money. Find your preferred combination of rates, fees, and service.

Get An Additional Free Rate Quote

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Homebuilder Confidence Hits 13-Year Best For May

National Association of Home Builders (NAHB) Housing Market Index chart - Griowella
Homebuilder confidence hits 13-year best for May

Home builder confidence is rebounded.

According to the National Association of Home Builders (NAHB) and its monthly Housing Market Index, U.S. homebuilders feel better about the future of new construction housing.

May’s reading of 70 is a two-point improvement from the month prior. It’s also the highest reading for a May since 2005.

The trade group’s news is a net positive for U.S. housing. However, for buyers of new construction, a bump in builder confidence adds pressure in an already-challenging market.

When builders hold more confidence, they’re less likely to offer free upgrades in kitchens and bathrooms to help sell their homes. They may also be less willing to negotiate on price, resulting in a higher sales prices for the same single-family home.

Additionally, mortgage rates have climbed 0.625 percentage points since January 1 , adding $40 to mortgage payments for every $100,000 borrowed.

That, too, raises the cost of homeownership for today’s new buyers.

So, if you plan to buy new construction later in the year or into 2019, consider moving up your timeline. As home prices rise, changes in mortgage rates could push home affordability beyond what’s comfortable.

Talk with a real estate agent and make yourself a plan. See what’s available today.

Written by Dan Green

Dan Green is a personal finance expert and the founder of Growella. His expertise has been cited by The Wall Street, NPR, and CNBC; and, his advice has helped millions of people make better choices with their money. Dan hosts the mortgage news show "The Mortgage Minute-and-a-Half" three times weekly on YouTube.

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