Under QM regulations that took effect in January, one of the underwriting criteria for a loan to be originated as a Qualified Mortgage is that the borrower must meet a monthly debt to income ratio (DTI) of no more than 43 percent . The monthly debt payments include recurrent debt obligations such as student loans, auto loans, revolving debts, and any existing mortgages not paid off before getting a loan .
The chart below shows NAR Research’s calculations of the debt to personal income ratio for student debt, auto, and credit card debt with mortgage debt (red ) and without (blue) across age groups based on household debt and income data in 2012 . Using income data for persons with at least an Associate degree, all age groups will meet the 43% DTI except for the “21 to less than 30 year old” group. For this age group, the monthly student, auto and credit card debt payments are about 30 percent of income. Now, with mortgage payments for a starter price home of $149,425 in 2012 at 10% down payment and a 30-year fixed term , the debt to income ratio (red) increases to 61 percent.
The implication for millennials is that a home purchase may be pushed back and borrowing ability is adversely affected. Assuming that this group’s income grows at 5% per year, they will meet the 43% DTI in seven years. With an average student debt of $21,402, their current borrowing ability declines by the same amount .
What does this mean for REALTORS®?
REALTORS® may need to provide some insight to first-time homebuyers and options for addressing this issue.
1. Working with the buyer to get an overall financial picture of what can be done.
2. Looking for alternatives may be necessary—rentals, rent to buy, assuming a mortgage, exploring financial options.
 This blog benefited from the comments of Dr. Jed Smith, Managing Director, Quantitative Research, NAR-Research.
 The 43% DTI only applies to qualified mortgages (QM) which are mortgages that provide protection to creditors against consumer’s claims regarding inability to repay. Creditors can still provide mortgages that are not QM but must follow ability to repay guidelines.
 “Ability to Repay and Qualified Mortgage Rule Small Entity Compliance Guide.” Consumer Financial Protection Bureau. http://files.consumerfinance.gov/f/201304_cfpb_compliance-guide_atr-qm-rule.pdf
 Household debt data is from the Federal Reserve Bank of New York Household Debt and Credit Report Q3 2013 at http://www.newyorkfed.org/microeconomics/data.html. Personal income data for persons over 21 years with an Associate degree or higher is from the American Community Survey, 2012, 1 year estimate. http://www.census.gov/acs/www/data_documentation/pums_data/
 Based on NAR’s Affordability Index estimates for first-time homebuyers found on Haver.
 A $21,402 student debt translates to a monthly payment of $244.11 at 6.6 percent interest payable over 10 years. The present value of these payments at 4.1% interest is $ 23,998 and at 90% LTV, the amount borrowed is $ 21,597.80.