If applicants apply jointly, must DTI only be looked at jointly? Or could a financial institution also consider DTI of each borrower? In other words, can both applicants separately be required to qualify under banks credit standards (including meeting DTI requirements) or must a joint application only be looked at as a package deal?

What does your underwriting policy say? That is the guiding light that underwriters must follow.

Husband and wife jointly applies for a loan. Wife is a high powered - highly compensated executive and the husband is a stay at home dad. You going to deny them the loan because the dad has no income?

Randy, I agree 110% -
I was hoping the poster would find some basic guidance in the lending policy rather than having each loan officer make their own decision. That scenario of individual interpretation would be an invitation to the DOJ to pay the bank a visit.
Thanks for clarifying the practical application.

So as long as combined DTI meets our lending standards this is all that matters?

Your credit underwriting policy is entirely up to you. We are just pointing out that not doing combined DTIs creates all sorts of pitfalls.

Thanks for the explanation and example. Are there any other examples or pitfalls (of not combining DTI) anyone wants to share?

Let's go back to the example Randy used. You don't seem to, at least following the separate DTI calculation idea, want to approve the loan with the husband who has no income. I assume you would counteroffer and say "we'll do the loan, but only to you Mrs. Smith....we don't want your husband on the loan". 10 years into your loan, roles have switched: Mrs. Smith is now a stay at home mom and Mr. Smith has retired from being a house husband and is now the super-bread winner....and nowhere to be found on your promissory note.

Is is safe to say that the request to apply jointly is verification the applicants wan their information looked at/considered jointly by the lender?

No - it means they agree to be jointly liable for the debt - how you underwrite them is up to you.

Depending on the circumstances, it can be a customer relationship issue. Here's a personal example.

Several years ago, when my daughter had just finished graduate school and was getting established in her profession, she had a limited credit history and almost no income history, so I agreed to be a joint applicant on her auto loan. Our credit union, where I had banked for decades and she had held her checking and savings accounts since she was a teenager, declined our application because her DTI based on the prior year's tax return income did not meet their standards. (She had no income her final year of school while she was completing her required internships.)

The bank that approved our application now holds her checking account, auto loan, mortgage, and credit card, as well as my primary checking and savings account and mortgage.

I'm just thinking about how many joint applicants would NOT meet DTI if each of their individual DTIs were considered... in my experience, many, MANY applicants need all applicants' incomes to meet DTI standards. I'm thinking looking at them separately, rather than jointly, could have a fair lending implication as it would prevent a large portion of your low to moderate income applicants from qualifying, but may not have as significant impact on the ability to qualify for affluent applicants.

What about a scenario like this: applicant 740 credit score, some prior established credit, but DTI is near 55% with co-applicant having a 670 credit score, very limited credit (only one trade on bureau with only 6mo history) and a DTI of 34%. Combined DTI is just shy of 40%, so under our current DTI threshold; but the stronger of the two applicants has excessive obligations in relation to income and the other has basically no prior credit. Together they have very little in the way of joint debt. We typically look at combined DTI, however in looking at the joint package deal, we aren't certain this is a good loan for us to make....can we turn down for the applicant for excessive obligations in regard to income and the co-applicant for limited credit file?

You can do whatever you want, but what do you then do for a married couple where the wife has the only income and the husband is a stay at home dad and their combined DTI is 15% but the husband does not have a DTI because he has no current income and both of their scores are in the 800s? You deny the loan because the husband has excessive obligations?

So we would be stuck doing this loan? Are there ways around making a loan like this (since its more risky from a safety/soundness standpoint to us than what we'd typically do)? Can household vs. non-household debt and income be considered? The two applicants in the first scenario don't live together and have entirely different debt and income, whereas with married couples, they share the same household income, and often have some/most of the same debt. Or would this be considered discriminatory based on a prohibited basis (marital status)?

How do other banks handle these types of scenarios??

Household v. non-household debt is very closely related to marital status and familial status. Different treatment of the two is on shaky ground from a fair lending standpoint.

Thanks InFairness. So just curious, does your FI have lending standard that would disallow this type of loan or would your lender be fine/comfortable making a loan like this?

Not InFairness, but it would likely depend on the product. Non-residential consumer products, we generally require a minimum number of tradelines and credit history from all applicants. Would definitely not be comfortable with household v. non-household.

Could both applicant and co-applicant then be denied the loan due to the co-applicant's very limited credit file?

You only have one application - you only have one denial.

Right, I understand that with multiple applicants, notification is only required to be given to one. So could the turndown reason be "limited credit file" - even though this only pertains to the co-borrower?

If your bank decides to go this route then you must do this for EVERYONE in this situation or face possible fair lending issues with your regulator. This includes your 'good customer' who is helping their child buy their first car.

I also feel you will have customer complaints which will need to be addressed.

Our standards would be product-specific, and more rigorous for unsecured than secured credit. The higher risk the credit type, the more stringent the requirements for each borrower.

Yes. If that's the reason you're denying the application, that's the reason that should be provided.