Sometimes news creates an opportunity for us to explain to our readers various parts of the mortgage process. That happened this week when business media highlighted the fact that a significant rule may expire this year. The rule involves one of the most important metrics for evaluating a mortgage application, the Debt-to-Income ratio (DTI). Your DTI is calculated by taking your monthly housing expenses (including insurance, taxes, and HOA/condo fee) and adding to it your other fixed monthly expenses such as auto loans and the minimum payment on any credit card debt. Divide that total by your monthly income. That is your DTI. Besides your credit score, it is the most important number in qualifying you for a mortgage.
For example, your housing expense is $2200 per month. Your car loan is $350 per month. Perhaps you also have a small credit card balance which has a minimum monthly payment of $20. Your monthly gross income is $7000. Therefore, your DTI is approximately 38%. That is a number that will get you easily approved for a mortgage, all other things being equal.
The rule that may be allowed to expire is one that allows your DTI to exceed 43%. That max DTI was established in the wake of the 2009 financial crisis, but Congress and our regulators made a rule that allowed the DTI limit to exceed 43%, and in fact up to 50%, if your loan application is approved under rules established by Fannie Mae and Freddie Mac. These exceptions make sense because Fannie and Freddie approve mortgage applications based on a totality of factors, as opposed to just one single factor. However, if not extended, the maximum DTI for what are considered “Qualified Mortgages” will be 43%, regardless of any compensating factors.
We have always found that having extra flexibility regarding DTI has helped many of our clients, particularly when there is income that cannot be counted for qualifying purposes such as irregular bonuses or room rents. We will keep an eye on whether this flexibility will continue, and keep you posted.
Steven H Hofberg, Operations Manager
There is good news to report this week, and it comes from Fannie Mae. Fannie has implemented some new policies that will make it easier for those owing student loan debt to qualify for a mortgage. I’m sure most of you are aware through media reports or other sources that student loan debt is a significant issue for many graduates these days. In fact, a study just completed by the Federal Reserve Bank of New York found that 44 million Americans have student loan debt, and 7 in 10 graduates in 2015 have debt averaging $34,000. And these figures exclude for-profit institutions. Needless to say, this debt seriously impairs the ability of these graduates to buy a home, or to refinance an existing mortgage, for example, to take advantage of favorable interest rates.
There are three new policies – first, Fannie will offer lower cost cashout refinances (by about 1/8 to 1/4 percent in interest rate) if at least one student loan is paid off with the proceeds; in other words, Fannie will price the loan as a non-cashout transaction, which has a lower rate than a cashout loan.
Second, for student loans in payment status, Fannie will accept the actual payment amount rather than imputing a monthly payment of 1% of the loan balance. The imputed payment usually results in a debt ratio far in excess of that required to qualify for the mortgage.
Finally, if the student loan payments are being made by others (think parents), and a 12 month history can be documented, Fannie will exclude the monthly student loan payment from the borrower’s debt ratio, thereby allowing many more graduates to qualify for a mortgage loan. As an example, suppose an applicant’s monthly salary is $5,000, and they have fixed monthly debt including a student loan payment of $2,500. The debt ratio (called DTI) is therefore 50%, which would not qualify for the new mortgage. However, if the parents have been paying the $500 per month student loan for 12-plus months, it can be excluded, resulting in a DTI of 40% which would qualify.
For more information on this subject or anything mortgage related, please contact Margie Hofberg at Margie@rmcenter.com or call 240-428-1650 x112. Have a great week!
Have a great week!
Kindly,Steven Hofberg Operations Manager Residential Mortgage Center Inc.
In evaluating a loan application, one of the primary underwriting factors is “qualifying income.” An underwriter must determine that the borrower’s income is “qualified” under applicable agency and lender standards in order to count it for the loan, and to use it in determining their ability to repay the loan. Qualified income basically means income that is stable and regular. Salaried employment is typically not a problem; neither is self-employed income although it requires more documentation. But for many of our clients, part or all of their income is derived from support payments, whether alimony, child support, or both, and so the qualifying rules applicable to support income are very important. Those rules have recently changed and are now more stringent, particularly regarding how much of a history of receiving payments is required to be shown in order to qualify the support income.
Previously, although certain lenders and certain programs sometimes had different rules, the Fannie Mae automated underwriting system would usually specify that a payment history of no more than 3 months be verified for a borrower relying in whole or in part on support income.
The current rules create “tiered” levels of payment history, with the first tier being 6 months of regular payments. If there are fewer than 6 months of payments, the income will not be considered stable and therefore generally cannot be counted as qualifying income. If the payment history is at least 6 months but less than 12, the support can be considered stable if it does not exceed 30% of the borrower’s total gross qualified income. However, an underwriter is allowed some leeway based on their discretion for histories of between 6 and 12 months. Finally, a payment history of regular payments for a period of at least 12 months will be considered stable and therefore qualified income. The underwriter will look at payments received in the months immediately preceding the month of application.
Keep in mind that there are other rules that must be met in order to use support income for a mortgage. Most of these have not changed. Two of the most important are that the payments be “full, regular and timely” (partial or sporadic payments will not be counted), and that the agreement or court order specify that the payments continue for at least 3 years following the month of application.
These are big changes and will probably affect many of your clients. Please don’t hesitate to call Margie with any questions about the changes or with any scenarios that you would like to review together.
Residential Mortgage Center Inc