Is Mortgage Qualifying Too Tight???

It feels like a very twisty road to closing loans these days, and there's a notion out there that "banks aren't lending", but it's far from true.  Some kinds of transactions are much harder to finance, but money is flowing.  You might be surprised to hear me say that standards are arguably still "loose".   No doubt, banks have found some sanity again, and refuse to lend to Jane who is without verifiable income, or Joe who has years of spotty credit.  But reasonably-well-qualified Jack, who has decent credit and income can get a loan.  And he can still get away with a high debt to income ratio (DTI), by historical standards.

The way it was
Years ago, the maximum DTI was in the range of 33 to 36%. That means about a third of your gross monthly pay could go to servicing the house payment (and any other debt service like car, student loan, credit card payments).  From the late 1970s until 2005, DTI standards continued to get looser and looser. Eventually, even those with sketchy credit records could get a mortgage regardless of DTI.  Today banks hold the line around 45% DTI.  That's an improvement, but think about it...

That's 45% of your gross monthly pay. Once you have had withholdings for taxes (30% or so), health insurance (5-15%), etc., and you have 45% going to debt service, there is very little left to live on.  If that's not immediately clear, try it with your own gross household monthly income... how do you feel about a house payment that's 45% of gross?  Make you crazy?  A bank might still approve it today.

Sure, there are cases where the DTI can be high because of extenuating circumstances, but the average household with stable income at 45%?  Not so much.  It would barely leave room for paying the bills, let alone saving for a rainy day or retirement.

High Hurdles
Now, to distinguish qualifying standards from regulatory hurdles.  Regulatory hurdles aren't about what it takes to qualify, but the required process to get to funding.  Today, those hurdles and our processes are beyond insane.  We have to deal with pointless but mandated timeframes to adhere to, checkboxes ad nauseum, and even more disclosures than a seasoned borrower can imagine.  The process is more expensive and slower, and no more consumer-friendly, 180 degrees opposite to what the regulators intended.  In that sense, lending is stupid-tight today.
 
The Future
Going forward, two things must change, although the change may come slowly. 

1. Near term, we're seeing even more regulation (a la the 2300 page Dodd-Frank monstrosity, for example) and then a prolonged fight to lessen the regulatory hurdles back to something more reasonable...and make them truly serve borrowers and lenders, rather than impede smart lending and smart borrowing.  There's no other way. 
2. We'll also see debt ratio guidelines tighten further, back toward the historical standards of 25/33 or 28/36.  They must as well.