On July 29, Fannie Mae, the big quasi governmental agency that buys most home mortgages and sets the underwriting rules for lenders, will make one of those hurdles a little lower: borrowers’ debt to income.
There are many hurdles potential homebuyers must overcome in order to qualify for a mortgage: down payment, good credit score, good income and low debt. On July 29, Fannie Mae, the big quasi governmental agency that buys most home mortgages and sets the underwriting rules for lenders, will make one of those hurdles a little lower: borrowers’ debt to income.
On that day, Fannie will expand the debt to income, or DTI, ratio from 45 to 50 percent. Debt-to-income is the total amount of recurring monthly debt – credit card payments, auto loans, student loans, etc. – plus the cost of a mortgage and other housing costs, including the monthly principal and interest payment, property taxes, homeowner association fees (if applicable), private mortgage insurance (if applicable), compared to a borrower’s total monthly income.
Currently, Fannie Mae wants to see no more than 45 percent DTI. If a borrower had $7,000 in gross monthly income, to qualify for a conventional mortgage, he/she could have no more than $3,150 in monthly debt, including housing costs. That amount will now be increased to 50 percent, or $3,500 on a monthly income of $7,000.
This is good news, especially for many millinials with large amounts of student debt. But be warned, just because the DTI ratio has been expanded to 50 percent of income does not mean a potential borrower meeting that ratio will automatically qualify for a mortgage. Borrowers still must overcome the other hurdles of down payment and good credit score (at least 720 for a conventional mortgage underwritten by Fannie Mae).
But at least the expanded DTI ratio gives some borrowers more options. Previously, borrowers with high debt had only the Federal Housing Administration (FHA) to turn to. FHA accepts DTI ratios higher than 50 percent. It also has lower credit score requirements than Fannie Mae (even under 600). The tradeoff – which is a big one – is that FHA requires borrowers to pay private mortgage insurance for the life of the loan. Fannie Mae, on the other hand, will automatically cancel PMI when the loan balance reaches 78 percent of the original sales price.
Borrowers should evaluate their total financial condition and choose the best mortgage program for them. And now they have more options to choose from.
Linda Goodspeed is a longtime real estate writer and author of In and Out of Darkness. Email her at: firstname.lastname@example.org.