Fannie Mae raised the debt-to-income ratio ceiling from 45% to 50%, as of July 29, 2017. This change opens a world of possibilities for many people who have previously been unable to qualify for a mortgage because of their debt-to-income ratio, according to an article by Kenneth Harney in The Washington Post.
Although Fannie Mae raised the DTI required to qualify for a mortgage, the federal “qualified mortgage” rule remains at 43%. In general, according to the CFPB, borrowers with a DTI above 43% will not qualify for more risky loans such as interest-only, negative amortization, and balloon payments.
What is a debt-to-income ratio (DTI)?
DTI is a ratio of your gross monthly income in comparison to all your monthly debt payments, including student loans, credit cards, car loans, and more. For example, if you make $5,000 per month and you have $2,500 in monthly debt payments, your DTI is 50%.
Why Does DTI Matter?
In studies by FICO and the Federal Reserve, the most important factor in mortgage applications is your DTI. That’s because borrowers with high monthly debt payments are more likely to fall behind on mortgage payments.
So why the change?
In his article, Kenneth R. Harney explains:
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.
Of course, this doesn’t mean that everyone with a DTI higher than 45% will be approved. There are other things taken into consideration as well, including your loan-to-value ratio, credit score, and your down payment.
There are many factors that go into qualifying for a mortgage, besides your debt-to-income ratio. If you are thinking about buying a home anytime soon, contact a mortgage lender and get preapproved for a mortgage.
By going through this process, you will know how much you can spend on a home, and what you can do to improve your finances and possibly qualify for a mortgage with a lower interest rate.
Marimark Mortgage is based in Tampa, Florida, and serves the mortgage needs of homebuyers and homeowners in Florida, Virginia, and Pennsylvania.
We specialize in conventional home mortgages, FHA, VA and USDA mortgage options, refinance loans, and reverse mortgages. We’ve worked extensively with cash-out refinancing, and help clients with HARP refinancing to lower their monthly mortgage payments.