RateWatch #361 – Ratios, Credit, Race
June 21, 2003 by Dick Lepre
dicklepre@rpm-mortgage.com
Ratios. What Ratios?
I had two interesting phone conversations with borrowers this past week. One said that she knew the she needed 28/36 ratios to qualify. The other had ratios of 46/68 and was approved for a cash-out transaction.
By "ratios" we mean housing and debt ratios. Your housing ration is your PITI - principal, interest, tax, and insurance divided by your income. Your debt ratio is your (PITI + consumer debt)/your income. In the good old days, underwriters wanted a housing ratio under 28 and a debt ratio under 36.
These numbers are no longer of very much consequence. The FNMA Desktop Underwriting system bases its decision more on credit score than anything else. In short, if you have good credit and good equity in the property who cares what your income really is? It is generally understood that the way that mortgage lenders tend to underwrite income is fairly conservative. The FNMA DU system relies on the empirical evidence that folks who have, say, 750 credit scores and a loan-to-value ration of 60% are very likely to make their mortgage payments.
The point of this is the following: if you want to refinance and have good credit and decent equity do not let that old 29/36 rule stop you.
In fact, if you have credit scores of at least 730 we can usually do a stated income/stated asset or "No Doc" loan.
Ratios, Credit Scores and Race
Blacks are turned down for mortgages twice as often as whites. Blacks who earn $60,000/year are turned down more often than whites who earned $50,000/year. These are facts. They are accurate. But they are not the whole story of the mortgage business. Whites are turned down twice as often as Asians. No one is likely to conclude that the mortgage business is run by a group
of Asians who are discriminating against whites and blacks.
I do not believe that a significant number of blacks or whites are turned down as a result of their race or ratios. The fact lurking in the background is credit. Having looked at many loan applications over the years I would offer that race is correlated with credit score. Asians have higher credit scores than whites who have higher credit scores than African Americans.
Credit scoring is "per se" color blind. That is, it looks only at the raw data in one's credit history. It does not add or subtract points for race.
What I do believe is that there is virtually no racial motivation from mortgage lenders. The differences in "turn down" ratios are not the result of race but the result of credit. Almost all mortgages from single-family homes are sold to FHLMC and FNMA and they care nothing about race.
The one thing that I know for sure is that credit scores are more important than ratios or race. Keep your credit usage down (don't let balances on credit cards go over 60% of the credit limit) and make your payments on time. If you are young and a member of a minority, understand that you have control over your credit score. If you have good credit scores, no one in the mortgage business will care what your last name is or what color your skin is.
Anyone who encourages members of a minority to think that they are going to get screwed by banks is doing a disservice. This discourages them from entering a forum where they are likely to be treated fairly and instead go to a sub-prime lender who specializes in screwing people of the same ethnicity.
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