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Qualify for a Mortgage: Easier is on the Horizon

The housing bubble was a time of high demand and low supply in the housing market, and nearly anyone who wanted a mortgage could get one. The housing bubble burst, the market crashed, and lenders drastically tightened mortgage loan qualification standards. Now, ten years later, mortgage lenders are relaxing their standards.

Mortgages will now be more accessible to first-time home buyers. In the past, many would-be homeowners have been turned away by mortgage lenders due to debt like credit cards, and car and student loans.

Those individuals may now see their home-owning aspirations reach fruition with new mortgage qualification standards.

Millennials and Student Loans

Student loans and mortgages are the largest contributors to the debt of Americans. When considered with the ever-increasing home prices, it makes sense that homeownership among Americans under the age of 35 is at a multi-decade low.

Of student loan borrowers, 71 percent provided student loans as a reason they haven’t bought a home. With the loosening of mortgage lender standards, millennials may now be more able and adept to become first-time homeowners.

Changes to Qualifying for a Mortgage

Two significant mortgage lending changes are available at a time when fewer homebuyers are seeking mortgage loans because the market is offering fewer homes to buy.

One change was to America’s main credit reporting agencies which will no longer display incomplete civil judgment and tax lien information on consumer profiles. A second change was to Freddie Mac and Fannie Mae which will now allow aspiring mortgage borrowers with a higher debt-to-income ratio to qualify for a mortgage loan.

New Fannie Mae Standards

Fannie Mae is the largest mortgage source in the U.S. and has relaxed its debt-to-ratio income standards.

With mortgage loan standards changing, many banks have offered insight into the debt-to-income ratio. Lenders use debt-to-income ratio to determine the ability of a borrower to make their loan payments. Lenders calculate debt-to-income ratio by dividing the borrower’s total monthly debt payments—like car, credit card, and student loan payments—by their gross monthly income. This way, the lender can determine if the potential borrower’s budget is flexible enough to add a monthly mortgage payment.

This fall, American’s are able to enjoy these relaxed borrower standards.

Prior to July 29, the Fannie Mae mortgage loan standard was a debt-to-income ratio of 45 percent. Post-July 29, Fannie Mae’s relaxed debt-to-income ratio standard is in effect; Now, the borrower can have a debt-to-income ratio of 50 percent and quality for a mortgage loan.

With the new standard, borrowers with higher amounts of debt, like millennials with student loans, will more likely qualify for a home loan.

Fannie Mae Changes to Debt-to-Income Ratio Rules are Helping Buyers

Fannie Mae’s increased debt-to-income ratio standard from 45 percent to 50 percent didn’t help all borrowers qualify for a mortgage loan, but it did help those who were on-the-edge. A Fannie Mae spokesperson provided Fannie Mae analyzed years-worth of data to better understand borrowers’ ability to make their mortgage payments.

In the analysis, Fannie Mae’s concern was the borrower’s risk of default. Generally, a higher debt-to-income ratio correlates with a higher risk of default. Fannie Mae’s analysis concluded that by increasing the debt-to-income ratio qualification standard to 50 percent, additional qualified applicants would be able to receive mortgage loans.

A loan originator in Indianapolis suggested Fannie Mae is opening the mortgage loan door in an effort to make more loans available in a rather stagnant market. Interest rates and debt ratios usually trend the same—when one goes up, the other goes up. Right now, interest rates are down. Fannie Mae’s goal is to increase the number of people eligible for mortgage loans and to become homeowners.

Multiple mortgage lenders have already increased the share of approved mortgage loans for borrowers with debt-to-income ratios higher than 43 percent—which is the Consumer Financial Protection Bureau’s recommended threshold.

A chief economist provided that many borrowers are already being granted loans at the highest threshold. More Americans are qualifying for home loans, but it’s unknown whether the change in debt-to-income ratio standard will significantly affect homeownership rates.

Debt-to-Income Ratio at Your Bank

The Fannie Mae changes to mortgage standards are positive for mortgage applicants, but they won’t ensure that applicants are granted a mortgage loan. Fannie Mae buys and insures mortgages. That means they provide mortgage insurance to lenders to compensate lenders on defaulted mortgages, but they do not actually provide loans to applicants—your bank does.

The financial entities like banks and credit unions that offer loans each stand by their own, unique applicant criteria. The hope is that individual lenders will alter their debt-to-income ratio policies to enable more applicants to be approved for mortgage loans.

Longtime mortgage brokers recommend if a specific lender refuses to underwrite to the Fannie Mae debt-to-income ratio guidelines, the applicant should seek another lender who will.

The Debt-to-Income Ratio Changes Aren’t One-Size-Fits-All

Mortgage lenders consider the entire mortgage application before rendering a decision, as each applicant will be in their own, unique situation like the combination of specific debt-to-income ratio, credit score, steadiness of income, and down payment. Though mortgage application standards are relaxed, mortgage lenders will continue to strictly verify all the circumstances and applicant criterium.

Mortgage specialists recommend considering alternatives if your mortgage application is not approved like seeking a lower priced property, apply with a co-signer, or offer a larger down payment.

One of the largest issues millennials face in the home-buying process is fulfilling the down-payment. The debt-to-income ratio is often irrelevant for older individuals in a higher career level.

All aspiring homebuyers can now be optimistic. The FICO and debt-to-income ratio changes loosening mortgage applicant standards will have a significant and positive impact to help millions of Americans achieve their home-buying goals.

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