The most common reason mortgage applicants are denied is due to their debt being too high relative to their monthly incomes. This is especially true for millennials just starting their careers and carrying student debt. Luckily for them, last month Fannie Mae announced that on July 29th it would be raising its debt-to-income (DTI) requirements from a current 45 percent to 50 percent.
There are several factors that contribute to qualifying for a loan and accessing the affordability for each buyer, and DTI helps lay out the foundation for a buyer’s qualification. DTI is a ratio that compares your gross monthly income to your monthly financial obligations, including car payments, credit cards and student loans. This also includes the projected PITI, or total monthly mortgage payment which is combined of the loan’s principal and interest, property taxes, and home insurance. Fannie’s new policy raising the required DTI ratio potentially opens the door for more homebuyers to enter the market.
Is it risky?
According to this Washington Post article, “Using data spanning nearly a decade and a half, Fannie’s researchers analyzed borrowers with DTIs in the 45 percent to 50 percent range and found that a significant number of them actually have good credit and are not prone to default.”
With this new policy, homebuyers limited by their DTI ratios now have access to other lending options outside of FHA loans. FHA loans are forgiving of high DTI ratios, but require borrowers to pay for private mortgage insurance (PMI) for the lifetime of the loan. In comparison, Fannie Mae automatically cancels PMI on its low down payment loans when the principal balance hits 78 percent of the original property value.
However, this does not mean that anyone with a high DTI ratio will qualify for a loan under Fannie’s new policy. Applicants will be vetted by Fannie’s automated underwriting system. The system analyzes down payment size, income, credit scores, loan-to-value ratio and other indexes to determine whether the applicant meets the company’s standards.
While Fannie’s new policy is only a difference of 5 percent, potential homebuyers with a few extra debts weighing them down and those who need to increase their buying power or borrowing limit now have the ability to qualify for more loan options.
To see if you qualify under Fannie Mae’s new policy or to learn more about the latest in the mortgage industry, contact a loan advisor today.