Remember when I learned that FHA guidance
would make it much harder for me to get a mortgage any time soon? Things are changing, potentially.
Fannie Mae is changing
their debt-to-income (DTI) formula. This will allow some folks to qualify for a mortgage who could not under the old standards. The old DTI maximum was 45%, but at the end of July, it will be 50%.
What is the DTI Formula?
The DTI is simple to calculate. All of your debts go on the left of the colon and your income goes on the right. Then divide your debt by your income and multiple by 100. That is your DTI percentage.
- If I make $4000 a month, and have debt obligations of $2000, I have a DTI of 50% and am just barely eligible. 2000:4000 (2000/4000)100=50%
- If I make $4000 a month, and have debt obligations of $1800, I have a DTI of 45% and am eligible. (1800/4000)100=45%
This applicable DTI seems to be for Fannie Mae mortgages and not Freddie Mac or Federal Housing Administration mortgages. Their standards may or may not change to fall in line.
What does this DTI standard mean for me?
I’m not sure that this is a good move. The more debt you have relative to your income, the harder it is to pay for everything you need. This is true even without emergencies cropping up. Perhaps if the rent in your market is outrageous in comparison to your potential mortgage + insurance + maintenance, then this could be a boon for you.
Fannie Mae will still vet mortgage applicants for other default risk factors through their underwriting program. The standards are reasonable. You must still have a higher FICO score than some other mortgage programs; their minimum seems to be 620 for a fixed-rate mortgage. You must be able to prove your income and employment for the past two years. Your potential home must be appraised by a licensed appraiser. Fannie Mae also has a maximum amount for your loan. You still must go through an approved lender. The minimum down payment is 5% but the preference is 20%.
This change still seems risky. Everything in the US market seems frothy right now. Real estate and other investment prices do not seem to correspond to the underlying asset values in a lot of markets. It does not seem like now should be the time for loosening our standards. Just because you can receive a mortgage, that does not mean it is financially responsible.
The next thing I need to research on my quest to own a condo is the Fannie Mae Homepath program.
What do you think of the new DTI requirement? Good for the market or for individuals?