Fannie Mae relaxes debt-to-income guidelines
In an announcement last week, Fannie Mae indicated that it will incorporate higher debt-to-income ratios in its underwriting guidelines. Mark Wells at Preferred Financial Services discusses the impact this will have on borrowers buying or refinancing a home.
How significant is this change in the overall picture of mortgage underwriting? Beyond its impact on individual borrowers, this change seems to send a general message that Fannie Mae considers the fallout from the crash of 2007 to be largely over. This moves the industry into a more relaxed posture, allowing for exceptions to what had become very rigid underwriting guidelines.
What is the specific change that is being introduced? Previously, the formal debt-to-income limit for borrowers was 41 percent, with allowances for exceptions up to 44.99 percent. (The debt-to-income limit is the percent of a borrower’s qualifying income that is used to service all monthly debt payments. For instance, a borrower with a monthly income of $5,000 would be allowed to carry total debt payments of $2,050 per month, including the proposed house payment, under the old rules.) The new rule will allow a 45 percent debt-to-income ratio, with exceptions to 50 percent.
How does that translate to ‘real world’ numbers? Under the new guidelines, a borrower earning $5,000 per month could take on an additional house payment or additional debt payments of as much as $500 and still qualify for a house. A $500 additional house payment would translate to about $80,000 more purchasing power.
Is it a good idea to push my borrowing to the new limits? I would strongly suggest that it is a very bad idea to do so, with only a few exceptions. The old guidelines were based on 50 years of mortgage-default history which indicated that in most cases a borrower could carry a 41 percent debt ratio for an indefinite period without creating financial stress. That fundamental observation has not changed.
Are there any circumstances under which you would recommend a borrower use the advantage of higher qualifying debt ratios and buy more house? Two instances come to mind: a)a self-employed borrower whose access to income and cash flow is greater than the income reported for tax purposes, and b)a borrower who has substantial liquid reserves (cash in the bank) that can be used to cover a shortfall if a bad stretch comes along.
All exceptions to the 50 percent debt-ratio limit must be granted by Fannie Mae’s automated underwriting system.
I am happy to run your scenario through our Fannie Mae program to see if you qualify using the new guidelines.
I can be reached at 864-235-9596 or via email at Mark@TheGreatestRates.com.
Or Text Me Now! 864-430-4856
Copyright: Preferred Financial Services, Greenville, SC / NMLS #192279 / email: mark@thegreatestrates.com / phone: (864) 235-9596|Disclaimer|Terms & Conditions
