Fannie Mae recently announced changes to its debt-to-income ratio policy, increasing its allowance from 45% to 50% starting on July 29th. Here is what that’s going to mean for mortgage borrowers going forward…
A debt-to-income ratio is the benchmark tool lenders use to determine a borrower’s ability to repay. Such things as minimum payments on car loans, car leases, credit cards, student loans, and installment loans all inhibit a borrower’s ability to spend. Lenders take the minimum payments on these obligations plus a total proposed mortgage payment inclusive of taxes and insurance and they divide this number into your gross monthly income. Currently, that magic number is 45%. Put another way, your monthly expenses cannot exceed 45% of your monthly income.
On July 29th, this number is changing 50%. This is part of a bigger, broader plan to make borrowing easier for borrowers moving forward as a healthier economy continues to take shape. A 5% change in debt income ratio allowance could easily result in upwards of $30,000 more in spending power on a home purchase and as much as $20,000 more in loan amount when borrowing on a refinance. This is significant, because the debt to income ratio, while it is important, is only a small picture of the entire platform when observing the borrowers cash, and income, loan to value and other qualifying factors.
This change is going to be make getting a loan significantly easier for borrowers moving forward, allowing them to secure conventional financing over government financing with more flexible qualifying standards. Currently, FHA Loans will allow a debt to income ratio as high as 55% in some cases. FHA Loans also carry pricey mortgage insurance, typically resulting in a costlier mortgage when compared to a conventional loan, assuming overall good credit. A borrower with a good credit score seeking a conventional mortgage, and at least a 10% equity position would be far better suited for a conventional loan than an FHA loan. At the end of July, a borrower who would today have to go FHA, very easily might be able to go with a conventional loan just by waiting until July 29th, saving them significant costs over time.
If you have been turned down for mortgage loan financing anytime in the last 12 months or longer because your debt to income ratio is too high, you owe it to yourself to reapply with July 29th or after. You might just come to find that not only do you now qualify, you may be able to borrow more money, helping you achieve your financial goals more easily. Combine this change with historical mortgage rates, and you have a platform for an affordable mortgage loan scenario.
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