Debt has been one of the leading reasons why many potential homebuyers have refrained from applying for a mortgage. Beginning July 29, however, this may not remain such a recurring issue. On this date, Fannie Mae will be changing its debt-to-income (DTI) ratio requirements from 45 to 50 percent. As Fannie Mae is one of the largest sources of mortgage money, this could allow a huge number of new individuals, especially millennials, to receive home-purchase mortgages. 

You can calculate your DTI by dividing total household monthly debt by total household monthly income. For example, if Sally pays $1000 on her mortgage payment, $200 for her car loan, and $300 for her student loans every month, her total monthly debt is $1500. If she makes $4000 per month, then her DTI would be 37.5%. Basically, lenders use your DTI to measure the borrower’s ability to repay a mortgage. If a borrower’s DTI is high, a mortgage lender may look twice at the application because it can indicate that the borrower already has too much debt to take on a mortgage loan.

Fannie Mae has completed extensive research that supports raising the DTI ceiling, finding that a large number of borrowers in the 45-50 percent DTI range actually have good credit. The vice-president of single-family analytics for Fannie Mae stated, “What we’re seeing is that a lot of borrowers have other factors.” These factors mitigate the risks of a high DTI and could include, for example, high savings to handle financial emergencies without missing mortgage payments.

Of course, this raise does not mean that everyone in the 45-50 percent DTI range is eligible for a loan through Fannie Mae. If you would like to learn more about how your DTI fits into this new policy change, or if you have any questions about a mortgage application, contact one of our mortgage specialists today.