Historically was 30% the Debt to Income ratio (DTI) used to qualify people for home loans versus up to 50-55% today? I know there are some other limiting factors like at 50% (DTI) 100% Loan to Value should prove difficult to find. My question is that if 30% is the historic DTI level what would it take for a tightening of lending practices back to this? A quick example of the effect: using someone at around 50K on a yearly salary looking to enter into the market at entry level on an interest only loan the two different DTI’s yield far different results.
Assume gross monthly income is $4,000,
Interest only loan: (mo payment) = (Principle)*(6%)/12
50% DTI 30%DTI
Mo payment $2,000 $1,200
Max Loan AMT $400,000 $240,000
I realize I did leave out quite a few other costs like taxes, insurance and arbitrarily chose a 6% interest rate and assumed other monthly debts were zero, but it illustrates a drastic $160,000 loss of purchasing power with just changing the DTI from 50-30% of income. This would have a tremendous effect on entry level housing. If 30% is around the historic number what would it take to revert back to it?vMaybe my numbers are off?
Do you think lenders will go back to 30% ratios? I sure hope not! My wife’s meeting a lender Monday after work and I’ll get this question answered and post back.
I am in banking(compliance), and the idea that lenders are writing I-O loans at 55% DTI is horrifying.
Historically DTI’s over 45% have been associated with bad performance (high defaults), and DTI’s of 50% and over have been considered predatory lending. In my opinion non-amortizing adjustables with DTI’s over 35% should be classed as HOEPA loans, which require special disclosures, enhanced documentation, a special waiting period and restrictions on loan terms.
I agree with those that say this is a credit bubble, and I expect lenders to take losses of over 600 billion on RE loans by 2009. Many borrowers will take a severe hit. Many of them literally will not have understood the risks or the terms of their loans.
IMO, these loan terms have amounted to a massive consumer pyramid scheme.
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