When lending standards loosen up

Q: I’ve heard that lenders are now using looser standards when reviewing mortgage applications. Can more liberal requirements really help me get a mortgage?

A: There are two reasons we are seeing looser standards today.

First, lenders have fixed costs. When origination volume falls the cost per loan goes up. Since lenders want to have more closings they have eased certain standards.

Second, the new and easier standards are not especially new or easier — and they may not be desirable.

As an example, for the past few years lenders have generally limited the debt-toincome (DTI) ratio they will accept to 45 percent of a borrower’s gross monthly income. Now, in some cases, the maximum DTI is being bumped up to 50 percent.

If you have a household with an $8,000 monthly income then with a 45 percent DTI as much as $3,600 can be devoted to such costs as housing expenses, auto loans, student debt and credit card payments. At 50 percent, the monthly allowance jumps to $4,000 per month.

So yes, a higher DTI makes it easier to qualify for a mortgage. But do you really want to face huge debt payments every month? What happens if you lose a job or get fewer hours? How much can you save if half your income — before taxes — goes to debts?

What about mortgage loan limits? Higher loan limits used to be important because if you needed a bigger loan, you had to get jumbo financing and jumbo mortgages were more expensive. But that’s not the situation now. Today jumbo financing is priced at pretty much the same rate as conforming loans, and often lower.

One more. The nation is drowning in student debt. Such debt is real, and in many cases, it pushes DTI levels above allowable limits.

The mortgage industry has tried to deal with student debt by changing how payments are figured. For instance, if you owe $25,000 and are not making payments because of a deferment HUD said until 2016 that lenders had to add 2 percent of the debt to DTI levels, $500 a month in this example. Now the standard has been changed to 1 percent, a huge difference.

The bigger question is this: Why has student debt grown so much? Are students getting five times the education they used to get? Concerned borrowers ought to ask how come.

In the end, borrowers need to look at looser mortgage standards with care. If the standards are too easy do they also create too much borrower risk? If yes, maybe buy a less expensive property with a smaller mortgage, less debt, and fewer worries.