Mortgage Lenders Go Outside Official “Loan Rules”

November 06, 2020 by Dan Green

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.

  • FHA loans approved last month at an average DTI of 29/44
  • VA loans approved last month at an average DTI of 26/42

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 human. Talk to your loan officer to find out exactly how much house you can buy.

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