How does DTI work while building a house?
Lenders are pretty consistent and clear about how DTI (debt-to-income ratio) is calculated and the limit of 45% for a traditional mortgage against a primary residence. New construction loans seem to follow these guidelines. However, I’m unclear on how DTI is calculated during the construction period.
As a simple example let’s assume that after all other debts, a mortgage (P&I and taxes) of $2,000 would put me at 45% DTI. Now let’s assume that my current mortgage is $1,350, and I’d like to build a new home whose mortgage will be $1,500. Obviously, both of these payments fall well below the 45% limit, so I should not have a problem with approval based on my payments before or after I move.
However, new house construction usually takes around 9 months, and during that time I will still need to live in my old home. So for approximately a 1-year period I will need to carry both mortgages until the new home is finished, I move all my stuff in, and sell the old house. During that 1-year period my combined mortgage payments will be $2,850, well above the 45% limit.
How do banks deal with this situation on new home construction. Surely they can’t expect everyone building a home to keep both the home they own and the home they’re building under 22.5% DTI. Is the DTI requirement relaxed or ignored for the construction period? Or are home owners expected to live in an apartment or rental home in the mean time? What happens in a case when the home owner wants to rent out their existing home after the new one is complete instead of selling?
I spoke with a new construction mortgage specialist today. She told me that all debt, including current mortgage and the full payment of the permanent mortgage for the new construction, would be considered as debt. However, rental payments are considered temporary debt and not counted towards DTI.
So to build a new home you must sell your current home and then either rent it back from the buyer or rent another house/apartment during the construction period.
I hope this is helpful for others in a similar situation.