Mortgage DTI Update

Today we have a guest blogger from the mortgage industry. Paul Bender with Countrywide Mortgage has an important update for all homebuyers:

EFFECTIVE TODAY:  Customers that are purchasing homes with less then 20% down, now must have a 700 credit score and have a debt to income less then or equal to 41%.   Government loans (FHA, VA) are not effected.
If the customers are putting 20% or more down then they can have a credit score less then 700, the DTI still needs to be 41%.
This is coming on the heels that the PMI companies are not wanting to insure loans to customers with lower credit scores. So if you are working with a borrower that has been in contact with their lenders, get them to call and either LOCK their loans or see about changing programs to a government loan.

I want to take a moment and try to explain what PMI does and why we have seen the latest changes.
If a borrower buys a home as many did over the past several years and needs financing for more than 80%  of the purchase price, then the banks can do that only if they can get insurance from the PMI companies for the amount above the 80%. of the purchase price

Example: 150,000
Down payment 10% $15000
Loan to Value 90%
Unprotected amount $15000; therefore covered by PMI

The insurance company will insure the bank for the other difference between 120,000 which  it would be at 80% to avoid PMI and the loan amount of 135,000…the extra $15,000.

Well, as you can imagine if a customer goes into foreclosure or default on their loan, the PMI companies must step in and pay the banks off down to the loan to value of 80%, hence making it then easier for you all to get a short sale complete at a lower than balance owed price.

So  with all the foreclosures, the PMI companies have been hit really hard with having to pay up.  With all the claims that they’ve have had to pay out . . . they have pushed back and said, “No more” . . . they do not want to take any more risks.

The insurance companies have researched and found that it is the folks with lower credit scores and higher DTIs that have defaulted. So little by little, they have been raising the credit scores and lowering the DTIs for loans they are willing to insure.

As a result the banks are having to react as well . . . if we can’t get insured for the dollar amounts we are wanting to loan above 80% then it is a risk to the banks and the banks are pushing back . . . the banks have money to lend, but they are also wanting to be protected.

Thank goodness for small favors – Government loans are not affected by this latest round of changes.