Government-sponsored mortgage giant Fannie Mae will raise its debt-to-income limit from 45 percent to 50 percent on July 29, 2017. This would increase the pool of approvable borrowers for home sellers, and allow homebuyers to spend more.
The decision came on the heels of a study that concluded higher DTI ratios don’t increase the rate of mortgage default. Fannie Mae researchers examined over 15 years of data from borrowers with DTI ratios between 45 and 50 percent. They found that many of these borrowers had good credit and were not likely to default.
This change is a big deal, because according to the Washington Post, a too-high DTI is the most common cause of mortgage denial.
Your debt-to-income ratio compares your gross (before tax) monthly income to your total monthly debt payments on all debt accounts. Accounts include auto financing, credit cards, and student loans, plus the projected payment for the new mortgage.
How DTI Affects Your Loan Amount
If you earn $4,000 a month, previous guidelines allowed you to have total payments of $1,800 per month. If you had accounts totaling $700, your housing expense, including mortgage principal, interest, taxes and insurance (PITI) couldn’t exceed $1,100 per month.
After July 29, you’d be able to have payments totaling half of your gross income. If you earn $4,000 a month, you can have bills and housing payments up to $2,000 a month. If your other payments equal $700, you could qualify for a PITI of up to $1,300 a month.
How Much More Can You Borrow?
The new change will let some applicants with DTI ratios over 45 percent borrow more. How much more? That depends on your income and monthly debt.
You can see how allowing higher DTIs would increase what people can borrow. The borrower in the example above, earning $4,000 a month, can spend up to $1,100 a month for housing. Under new guidelines, the borrower can spend up to $1,300 a month.
Assuming that taxes and insurance come to $250 a month, this homebuyer can pay $850 a month for PITI under the old guidelines, and $1,050 under the new ones.
At a four percent mortgage rates, you could borrow $178,000 under the old rule. And $220,000 under the new one. That’s a loan amount over 20 percent higher!
Who Qualifies For Larger Loans?
To qualify for a mortgage with high debt-to-income ratios, you’ll need a strong application. That usually means a substantial down payment, or really great credit scores. Another plus is having savings after you close on your loan — enough to make several months’ mortgage payment if your income stops temporarily.
You’ll know if you qualify in seconds, once your loan officer or broker submits your file for automated underwriting.
That’s the beauty of Fannie Mae’s Desktop Underwriter software. You can get a decision quickly. In addition, your lender can run the program again and again. You can try out several scenarios until you find a way to get approved.
What Are Today’s Mortgage Rates?
Current mortgage rates edged up slightly after James Comey testified and the White House didn’t burn down. Political and economic uncertainty in Europe has been affecting interest rates here, but investors have remained optimistic about US markets.
Stocks ended yesterday with mixed results, changes that you’d not expect to warrant a major change in mortgage rates.
by GINA POGOL