You’ll be delighted to know that Fannie Mae is making it easier for you to buy your own home. Fannie did this by raising the debt to income ratios they will allow on the loans they purchase.
With these higher ratios you may now find it easier to buy your first home or qualify for a larger mortgage when you move up!
Fannie Mae did this several weeks ago on July 29, raising its debt-to-income (DTI) ceiling from 45 percent to 50 percent.
The reason most borrowers get rejected for a mortgage loan request is their incomes don’t justify the total combined amount of new debt they will incur with a home purchase. This was especially problematic with millennials starting their first career and having student loans and other debts with which to contend. The thought was if you are loaded down with monthly debts, you’re at a higher statistical risk of falling behind on your mortgage payments.
After performing a number of statistical studies that spanned a decade and a half on borrowers with a DTI greater than 45%, analysts found a significant number of these borrowers had good credit and were not prone to default.
Calculating the debt to income ratios
The DTI ratio consists of two components:
- total monthly obligations, which includes the qualifying payment for the subject mortgage loan (principal, interest, real estate taxes, homeowner’s insurance and any HOA or condo fees) and other long-term and significant short-term monthly debts; and
- total gross monthly income of all borrowers, to the extent the income is used to qualify for the mortgage.
As an example, with $7,500 in qualifying household monthly income and $3,375 in monthly debt payments, your DTI is 45 percent. If you’ve have the same income but $3,900 in debt payments, your DTI is 52 percent.
Even though your DTI may be below 50%, it is not the only factor that is important to the approval of the loan. You’ll still need to be vetted by Fannie’s automated underwriting system, which examines the totality of your application, including the down payment, your income, credit scores, loan-to-value ratio and a slew of other indexes.
“We feel very comfortable” with increasing the DTI ceiling, Steve Holden, Fannie’s vice president of single family analytics, told the Washington Post in an interview.
Factors that help alleviate the risks associated with slightly higher debt to income ratios:
- significant down payments
- employment stability
- ample liquid reserves set aside to handle a financial emergency without missing a mortgage payment.
- a well developed and exquisite credit history.
If existing liabilities such as student loans have kept you from becoming a homeowner, now may be the time to revisit this possibility and find out what the future holds for you.
Please be sure to ask your questions below in the comments section.