Tomorrow, It Becomes This Much Easier To Buy a Home in America

Tomorrow, It Becomes This Much Easier To Buy a Home in America

One of the biggest roadblocks to home ownership for many Americans is the traditional limit on the ratio between a borrower’s debt and their income. The debt-to-income ratio (DTI) cap is particularly hard on the Millennial generation, due to the lower income associated with being early in their careers, combined with the highest student debt load of any generation in history.

But starting tomorrow, several changes to mortgage underwriting guidelines go into effect at the largest loan buyer in the country, Fannie Mae. If you’re not familiar with the mortgage process, most home loans in the United States are eventually sold by the bank that lends the original money so that the bank can turn around and issue more loans. Fannie Mae is the largest buyer of these loans, but they will only purchase mortgages that meet their specific criteria.

Accordingly, most banks prefer to only lend money for home purchases that meet those Fannie Mae criteria. Those criteria include items such as minimum credit scores, DTI, and how various types of debt or debt problems are factored in.

Previously, Fannie Mae didn’t take into consideration whom was actually making payments on debt. So, for example, a college graduate whose student loan payments were actually being paid by parents or another organization was still treated as if they were making the payments themselves. For many Millennials, this essentially eliminates the potential for being able to buy a home.

Even if a college grad was paying their own student loans off, they may be on one of several different repayment plan options that reduce their actual monthly payments. Fannie Mae wasn’t taking this into consideration either, but instead calculating the full, original loan payment into their monthly debt load. This increases DTI, and could prevent a homebuyer from qualifying for the loan.

Now, Fannie Mae will only take into consideration the actual cash that the homebuyer is paying every month on their student loans and other debts if the payments are being made by somebody else. Documentation will need to be provided to validate these alternative payment arrangements, but the benefit to borrowers is tremendous.

But wait, there’s more!

Effective tomorrow (July 29, 2017), Fannie Mae will be increasing the maximum DTI from 45% to 50%. In other words, borrowers will now be able to qualify for the loan if their total monthly debt payments, including the new home payment, eat up as much as 50% of their monthly gross income.

This extra 5% may sound insignificant, but a surprising number of home loan applicants bump right up against the old 45% limit. This increase to 50%, combined with the new policy of not including debt payments being paid by somebody else into this ratio, will expand home ownership opportunities immensely for hundreds of thousands of Americans. Millennials saddled with student loan debt will be particularly pleased to learn about these changes.

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