Have you or someone you have known been rejected for a mortgage?
Here is some insight.
The number one reason why mortgage applicants get rejected: they are carrying too much debt relative to their monthly incomes. In the mortgage world, this is called a debt to income ratio. For millennials that are early in their careers, they are having to stretch every month to pay rent and their other bills.
Fannie Mae, the country’s largest source of mortgage money, eased it’s debt to income (DTI) requirements. This ease of requirements opened the availability to potential home buyers across America. Fannie Mae raised its DTI limit from 45 percent to 50 percent as of July 29th.
The basics of DTI looks at the gross income for a household and the monthly payments they have on all debts accumulated. Debts include credit cards, auto loans, collections, student loans etc. Then, the projected payments are added together along with the new mortgage allotment. When all of the debt is gathered into one number, this is compared to the gross monthly income to get a debt-to-income ratio determined.
For example, if your household has $8,000 in household monthly gross income and also has $3,500 in monthly debt payments, your DTI would be 43.75 percent. However, if you had the same amount of income but instead had $4,500 in debt payments, your DTI would be 56.25 percent, and so on and so forth.
In the mortgage world, the lower your DTI ratio, the better options you have for rates and the more attractive you are as a home buyer. Currently, the federal “qualified mortgage” rule sets the safe maximum DTI at 43 percent. However, Fannie Mae, Freddie Mac and the Federal Housing Administration all have exemptions allowing them to buy or insure loans with higher ratios.
Studies have been done by the Federal Reserve and FICO which determined that the higher the DTI ratio, the more likely that the mortgage consumer will have problems paying their mortgage. Ultimately this makes sense because the more monthly debts you have, the higher risk you have of falling behind on your mortgage payments.
Fannie Mae’s researchers have been analyzing borrowers with the DTI between 45 and 50 percent for the last fifteen years and have determined that the majority of borrowers in this range actually do have good credit and are not prone to default on their mortgage.
Have a great day!
Chris and Dawn
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