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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'm not 100%, but you'll have a construction loan, which will disburse money through several "draws" so you won't be carrying the full mortgage yet. Once construction is completed, the bank or another bank will take out a regular mortgage loan on it. You'll have to have all that in place. – mkennedy Jul 13 '15 at 19:14
  • And possibly a duplicate: money.stackexchange.com/questions/41679/… – mkennedy Jul 13 '15 at 19:20
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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.

  • Seems like an easier choice is to structure things such that [cost of house now] + [cost of new house] < 45% of total income? – Joe Jul 13 '15 at 22:47
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    @Joe That's also true, but seems like an unrealistic restriction to me. Especially given that because of the way credit scoring works it's often better to put the house under one person's name, even when you have a two income household, and thus are limited to that one person's income for the purposes of DTI. To keep both houses under that limit with 20% down, an individual with a $100k/year income would be limiting themselves to a $300k home... – Nicholas Jul 13 '15 at 23:11
  • Sounds like a reasonable home for that individual to me – Joe Jul 13 '15 at 23:12
  • You're also not considering an obvious choice I suspect: assuming most of the first house is paid off, or even some decent chunk, refi for a smaller payment. Take points to pay off the cost of the refi (since you're looking for less than a year). – Joe Jul 13 '15 at 23:14
  • @Joe That's a good suggestion. However, in our case we have about 25% equity in our house and are being forced to move. We'd really like to just 'trade' into a similar house where we have 25% equity. Sometimes whether we move is not necessarily up to us, and it can often be a lateral move so it's not even necessarily fiscally irresponsible. – Nicholas Jul 14 '15 at 14:05

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