Fannie Mae recently made an industry-shaking announcement: the company is increasing the allowable debt-to-income ratio to 50%, up from 45%, on July 29th. That means that in just a few weeks more buyers who were previously on the edge of securing a loan, including first-time, millennial, and lower to moderate income households, could now qualify for a mortgage insured by Fannie Mae.
Fannie Mae is hoping this change will help people with student loans, car payments, and credit card debt. The debt-to-income ratio takes a person’s monthly gross income and then divides it by monthly debt payments. This ratio is then used by lenders to determine if a potential borrower can afford monthly mortgage payments. Other factors also play a role in approving a potential borrower’s application, including their credit score, cash reserves, down payment amount, and household income.
While this is exciting news for potential buyers, it is important to remember that Fannie Mae insures mortgages and does not make the loans. Individual lenders have their own criteria when approving mortgage applications. However, it is possible that Fannie Mae’s announcement could influence lenders to follow suit and raise the allowable debt-to-income ratio.
With nationwide real estate inventory at historic lows, this new announcement has the potential to make our highly competitive market even more spirited.