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?