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What You Need To Know About Changing Debt-To-Income Ratio, Mortgage Qualifications

Brian Kline

Fannie Mae, Freddie Mac and Ginnie Mae control about 70% of single-family mortgage originations.

Although they are not quick to change the qualification standards, the government-sponsored enterprises frequently play with the debt-to-income ratio, or DTI. 

What The Ratio Means For Home Buyers

Fannie Mae’s current maximum total DTI ratio is 36% of the borrower’s stable monthly income.

The maximum can be exceeded by up to 45% if the borrower meets the credit score and reserve requirements reflected in the eligibility matrix. Other situations exist that allow the DTI to reach as high as 50%.

With today’s lower volume of mortgage applications, an easing of the DTI is likely.

But don’t expect a sea change in the number of mortgages being approved. Other requirements are still mandatory to prove that borrowers are low-risk, and one of them is typically a high credit score. 

Nevertheless, a lower DTI will provide help for some borrowers. 

Consumers who are carrying high student debt could be helped by such a change if they are otherwise well-qualified. 

It would also help qualified buyers in markets where home prices are consistently slightly out of reach for many buyers. This applies to both first-time and repeat buyers.

The Urban Institute estimates a shift from a 45% to 50% DTI would lead to 95,000 new loans being approved annually nationwide.

Other Mortgage Qualification Tweaks

FICO credit score calculations have also seen some tweaking. The big three credit rating agencies — Equifax, TransUnion and Experian — have dropped tax liens and civil judgments from consumers' profiles.

FICO said about 15.4 million American credit profiles had tax lien and/or civil judgement blemishes negatively affecting their credit scores.

It’s estimated that people saw an average improvement in their credit score of 20 points from the move. This is another good example of why consumers should review their credit profile regularly.

A study by the Federal Trade Commission estimates that 20% of consumers have at least one error on one of the three credit agency reports.

Student Debt Calculations Change

Student loan debt continues thwarting people with decent incomes from qualifying for mortgages.

Student loan debts of $100,000 or more are common, and $200,000 is common for married couples. A couple might have a combined income exceeding $150,000 per year and still not qualify for a mortgage due to the DTI ratio — not when combined monthly student loan payments are running $2,500 or even $3,000.

Lenders are finding ways to improve mortgage qualifications for borrowers with student debt.

Previously, it was common to calculate monthly payments as 1% of the outstanding loans.

When a student loan borrower is enrolled in an income-based repayment plan, the lower monthly payment can be used when calculating the DTI ratio. This can result in the monthly payment calculation dropping from thousands each month to $600.

The times when the only mortgage qualification was being able to fog a mirror are long gone. But any adjustments with the qualification critera is bound to help millions of home buyers.

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