On July 28th, Fannie Mae and Freddie Mac are increasing the maximum debt to income ratio for to buy a single family home. The end result is more borrowers will be eligible for home financing and be able to purchase a home due to the government sponsored entities changes.
What Is Your DTI?
A person’s DTI is calculated by dividing their total monthly debt payments, which includes credit card minimum payments, car loans, student loan payments and any other regular monthly debt commitments shown on your credit report by your gross monthly income.
The reason for the move was based on a report that determined higher DTI ratios don’t escalate the rate of mortgage default. Fannie Mae investigators reviewed more than 15 years of information about borrowers who had DTI ratios ranging from 45 to 50 percent on other loan products.
What they discovered was a good surprise. Many of these borrowers had good credit but were less likely to fall behind with late housing payments.
An FHA loan allows debt-to-income ratios of more than 50 percent in some cases.
This adjustment is really significant, due to the fact of reports by the Washington Post, that high DTI ‘s are the most frequent reason a loan is denied.
Segments of the Population More Prone to high-DTI
The largest population rejected due to high DTI ratios is Millennials, who often stretch to pay their rent early in their careers, according to the article. Fannie Mae is now looking to allow more homeowners to enter the market as it increases its DTI requirements.
Your debt-to-income ratio is a measure of your monthly income before taxes to your total monthly payments from all consumer debts on your credit report. Typical debts are installment loans, revolving charge accounts, and college education loans, in addition to the new mortgage payment.
How DTI Affects Your Loan Amount
Under current underwriting guidelines, a borrower that earns $7,600 a month was allowed maximum total payments of $3,292 per month. If you have monthly debt obligations totaling $500, your housing expense, which consists of principal, interest, taxes and insurance (PITI) couldn’t be more than $2,786 per month. And if HOA is necessary, that must be included in the calculation too. That makes it kind of difficult to become a homeowner in San Diego.
So once the weekend of July 29, 2017 has passed, eligible borrowers will be able to qualify for payments that are half of their gross income. If you earn $7,655 a month, you can have credit card, auto loan, student loan, and housing payments up to $3,827 a month. This makes qualifying a bit easier.
This new adjustment will allow some prospective homebuyers with DTI ratios in excess of 45 percent to obtain a higher loan amount. How much higher is based 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 $7,655 a month, can spend up to $2,792 a month for housing. Under new guidelines, the borrower can spend up to $3,327 a month.
With a 4.25% mortgage rate, you may be able to get a loan of $424,100 under the old rule. And $503,500 under the new one. That’s a loan amount over 16 percent higher! So, your buying or refinancing power has increased over 16%.
In January of 2017, San Diego County’s High Balance loan limit increased from $580,750 to $612,950 1.
This means a home buyer who wants to put down 5% is now able to purchase a home priced at $645,210. According to Zillow, there are 188 homes priced from $613,000 to $645,000.
Home buyers with a 10% down-payment can now buy a home at a sales price of $681,055. At this price point, there are 447 more homes the buyer may qualify for to buy.
Home buyers who have a 20% Down-Payment (without mortgage insurance) are now able to buy a home under a contract price of $766,187.
If the home is over these limits but the DTI is still under 50%, then the borrower would have to qualify using a jumbo loan or get a combo 1st and 2nd loan.
Fortunately, there are few portfolio jumbo loan products which allow a 50 DTI. In this case, they want you the borrower to have 9 months of mortgage payment, property taxes, and insurance in a liquid account. The loan to value limit is 90% or ten percent down.
2017 L.A., Orange, Ventura County Conforming Loan Limits – $636,150 2
The loan limits in these counties are considered high-cost and fall under the “high-balance” label.
A 5-percent down payment means the highest priced home you can purchase as a primary residence in L.A., Orange, or Ventura county is $669,631 and $706,833 for 10% down.
The loan limit for an owner-occupied duplex in these counties is $814,500 and a minimum 15% down payment. That translates to a purchase price of $958,200 or you would need a higher down payment.
All of the examples above assume the buyer has a 620 or higher middle credit score, will provide 2 years of tax returns and employment for 2 years. If the borrower needs a loan without tax returns look into the bank statement only, asset amortization, or cash flow rental mortgage products.
If you have satisfactory credit and qualifying income, getting a mortgage is not that difficult. There may be challenges or delays along the way but there a numerous solutions.
1. Loan limit in San Diego county is $649,750 in 2018
2. The loan limits in LA, Orange, and Ventura county have been increased in 2018 to $679,650.