Adapted from an article authored by Clare Trapasso | Realtor.com
We’re living in expensive times, but aspiring homeowners might soon get a break as it becomes a little easier for those with student, credit card, and car loan debt to qualify for a mortgage.
Fannie Mae plans to increase its allowable debt-to-income ratio from 45% to 50% on July 29. This means that more borrowers on the cusp of getting a loan (e.g., millennial, first-time, and lower- to moderate-income borrowers carrying more debt) could potentially qualify for a mortgage backed by Fannie.
The debt-to-income ratio is calculated by taking a potential borrower’s monthly gross income and dividing it by the borrower’s recurring debts such as monthly car payments. Lenders use this ratio to figure out if borrowers can afford to make their mortgage payments each month.
Fannie made the change after analyzing years of data that looked at the ability of borrowers to make their monthly payments. It determined that increasing the ratio will enable more qualified borrowers to get a mortgage loan.
Fannie, which purchases and guarantees mortgages, was already granting ratios of up to 50% with certain conditions—such as if the borrowers had deeper cash reserves, underwent financial counseling, or had higher incomes. The new change opens the door to borrowers with more debt who can’t meet those conditions.
However, not everyone will be benefit from the change. Fannie Mae insures mortgages, but it’s still banks, credit unions, and other financial entities that make the loans—and those lenders have their own criteria for debt-to-income ratios. But the increased debt allowance could encourage more lenders to make changes to their ratios.
A higher debt ratio isn’t a silver bullet for loan seekers, though. If you don’t have a good credit score or a sufficiently large down payment, it won’t change the outcome of your application.
Buyers who can’t qualify, even with the higher ratios, should consider other alternatives. The most logical answer is to look for homes in the lower end of their budget, find a trustworthy co-signer, or simply come up with more down payment money.
I assist my clients to secure mortgage financing and work with several lenders who are experienced in getting clients approved. If you or someone you know is looking to buy or sell a home, this is an excellent time to be active in the market. Call me at 682.551.0336 to discuss your housing requirements, or check out my website here: http://www.homearlingtonmansfield.com/