The country’s largest source of mortgage money, Fannie Mae, soon plans to ease its debt-to-income (DTI) requirements, opening the door to home-purchase mortgages for large numbers of new buyers.

This move by the mortgage giant will dramatically increase the number of people who will now be able to qualify for a home loan.

Per The Washington Post, “Studies by the Federal Reserve and FICO, the credit scoring company, have documented that high DTIs doom more mortgage applications — and are viewed more critically by lenders — than any other factor.”

Using data over the last 15 years, Fannie Mae’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.

Simple Definition : Debt-To-Income (DTI)

Debt-to-Income (DTI) is a lending term which describes a person’s monthly debt load as compared to their monthly gross income.

Mortgage lenders use debt-to-Income to determine whether a mortgage applicant can maintain payments a given property.

DTI is used for all purchase mortgages and for most refinance transactions.

It can be used to answer the question “How Much Home Can I Afford?”

Debt-to-Income does not indicate the willingness of a person to make their monthly mortgage payment. It only measures a mortgage payment’s economic burden on a household.

Most mortgage guidelines enforce a maximum debt-to-Income limit – and Fannie Mae has essentially “upped” that ratio to help more borrowers qualify!

Housing Ratio or “Front-End Ratio”

Lenders add up your anticipated monthly mortgage payment plus other monthly costs of homeownership. These other costs of homeownership could include homeowner association (HOA) fees, property taxes, mortgage insurance, and homeowner’s insurance.

Normally, some of these expenses are included in your monthly mortgage payment. To calculate your housing ratio or front-end ratio, your lender will divide your anticipated mortgage payment and homeownership expenses by the amount of gross monthly income.

Total Debt Ratio or “Back-End Ratio”

In addition to calculating your housing ratio, lenders will also analyze your total debt ratio. At this time your other installment and revolving debts will be analyzed and added together. Installment and revolving debts will appear on your credit report.

These payments are expenses like minimum monthly credit card payments, student loan payments, alimony, child support, car payments, etc.

Your monthly installment and revolving debts are then added in addition to your estimated monthly mortgage payment and housing expenses and divide that number by your monthly gross income.

Because of these changes by Fannie Mae, many individuals that did not qualify for a home loan might now be eligible under these new regulations.

Please contact me to find out more!