What Is Mortgage Underwriting? The 43% Rule Everyone Still Quotes Is Gone

Full transcript

Underwriting is a legal duty

An underwriter answers one question with documents: will this borrower repay this loan on these terms. Regulation Z makes it a duty, not a preference. A creditor shall not make a covered loan unless it makes a reasonable and good faith determination that the consumer will have a reasonable ability to repay the loan according to its terms. Underwriting is how the lender proves it did that.

The eight things a lender must weigh

The rule does not leave the inputs to the lender. It lists eight. Your income or assets, not counting the home. Your employment status. The payment on this loan. The payment on any simultaneous loan. Taxes, insurance and association fees. Your existing debts, alimony and child support. Your debt to income ratio or your residual income. And your credit history. Almost all of it must be verified with third party records.

Stated income is finished

The rule closes the loop on evidence. A creditor must verify what it relies on using reasonably reliable third party records, and it names them: an I R S tax return transcript, filed returns, W two forms, payroll statements, bank records, employer records, government benefit records. The Bureau's own compliance guide puts the consequence bluntly. It is no longer possible to originate loans based on stated income.

The forty-three percent rule is repealed

This is the part almost every article gets wrong. In December twenty twenty the Consumer Financial Protection Bureau issued a final rule that, in its own words, removes the General Q M loan definition's forty three percent D T I limit and replaces it with price based thresholds. Check it yourself. The phrase forty three percent appears zero times in the current text of the regulation. So does Appendix Q, the appendix the old ratio was calculated on.

Why the old number will not die

Because the source is still online and still hosted by the Bureau. The March twenty sixteen compliance guide, version two point four, is still served from the C F P B's own file server and still refers to the forty three percent D T I requirement under the general Q M provision. It was accurate when it was published and it has been superseded twice since. The April twenty twenty one replacement does not contain the phrase at all.

A price test, not a ratio

What replaced it turns on the loan's price. A qualified mortgage is one for which the annual percentage rate does not exceed the average prime offer rate for a comparable transaction by the amounts specified. Read the direction carefully. Take your A P R, subtract the benchmark rate, and the gap has to land below the threshold. Two and a quarter percentage points for a first lien at the top loan size tier, more for smaller loans.

FHA's thirty-one forty-three is a different number

If you have an F H A loan you will meet the ratios thirty one and forty three, and the coincidence is unfortunate. That forty three has nothing to do with the repealed one. It is H U D's ceiling for manually underwritten mortgages only, measured against Effective Income, an F H A defined term. Different agency, different denominator, narrower scope. With compensating factors the handbook allows up to forty and fifty.

Clear to close is not official

Two more things worth knowing. Clear to close appears zero times in the eighteen hundred and eighty six page F H A handbook, and so does the three C's. They are useful shorthand, not status. And nobody official publishes how long underwriting takes, so ignore any average you read. The only federal clocks are on the paperwork. The full breakdown is on Dreamy Leads dot com.