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#2266638 - 02/21/22 02:37 PM
Re: Debt Service Coverage Ratio
jlroberts
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10K Club
Joined: Jul 2001
Posts: 84,359
Galveston, TX
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How you choose to underwrite your loans is really a business decision. As long as you can prove ATR to avoid a lawsuit from the consumer would be the risk you would have to weigh.
However, loan underwriting needs to be done according to your board approved credit underwriting policies. A loan officer does not get to decide to underwrite one customer or one loan in a manner different from any other similar customer. That is the quickest way to a fair lending disaster.
What new rules are you talking about that go into effect in October?
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#2266646 - 02/21/22 05:58 PM
Re: Debt Service Coverage Ratio
jlroberts
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10K Club
Joined: Jul 2001
Posts: 84,359
Galveston, TX
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Yes - the 43% DTI is gone after that date when the Legacy General QM sunsets, but ATR remains and does not disappear, only the hard and fast 43% is eliminated.
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#2266649 - 02/21/22 06:38 PM
Re: Debt Service Coverage Ratio
jlroberts
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10K Club
Joined: Jul 2001
Posts: 84,359
Galveston, TX
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What is DIR? and why would you ever use DSCR because someone is self-employed? Sounds like you want to re-write your entire loan underwriting policy for one borrower. Why are you using anything outside of Schedule.C and E for individual income purposes? I mean you are free to do whatever you want to, but if this is such an issue why is it coming up now?
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#2266654 - 02/22/22 12:18 PM
Re: Debt Service Coverage Ratio
jlroberts
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10K Club
Joined: Jul 2001
Posts: 84,359
Galveston, TX
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" The loan officer asked me why we had to use two different methods to underwrite two different types of loans for the same borrower. "
Because they are two types of loans. You do not use DTI in business lending, as it just does not work. You would never make a business loan based on DTI as most of your businesses would never be approved. Same thing with DSCR and consumer lending, you are not measuring the cashflows of a consumer in the same manner as a business. A good DSCR would be 1.25 and you would never make a consumer loan based on such a ratio.
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#2266684 - 02/22/22 05:45 PM
Re: Debt Service Coverage Ratio
rlcarey
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Junior Member
Joined: Sep 2018
Posts: 44
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Can you elaborate more on your thoughts on this or give specifics? We have had similar discussions recently as we frequently upset business members who are able to get approved for large business loans but struggle to get approved for other loans. If properly documented in our Board approved lending policy, why wouldn't we be able to use a DSCR for approving a portfolio mortgage for a business owner. I don't see any greater risk associated with personal mortgage than with the business real estate loan. From a regulatory perspective, ATR comes to mind....but i don't believe there is anything that requires use of a traditional DTI to prove that an application is compliant.
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#2266687 - 02/22/22 06:21 PM
Re: Debt Service Coverage Ratio
jlroberts
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10K Club
Joined: Jul 2001
Posts: 84,359
Galveston, TX
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How do you tell the guy, we're willing to lend to you on your rental but not your house?
Because you are usually requiring a larger down payment and on a business loan, you are always relying on the value of the collateral as a secondary source of repayment. From a business standpoint, if I am making a profit and can meet your DSRC, then you will make the loan.
That really has nothing to do with the amount of profit that specific asset will produce. I might have a multi-million-dollar portfolio of rental houses, but that does not mean it produces enough profit for the owner for them to afford their own $500,000 house.
If you choose to do this, then you better be doing it for everyone - and I mean everyone. You cannot underwrite some consumers on DTI and some on DSCR without potentially crossing the fair lending line, regardless of how they derive their income.
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The opinions expressed here should not be construed to be those of my employer: PPDocs.com
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