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
A recent Wall Street Journal article was a
reminder to us that not everyone is aware that you can get a home mortgage at
virtually any age, even one that amortizes on your 120th (or later) birthday.
Entitled “You’re Never Too Old to Apply for a Mortgage,” the Journal article
makes two important points. One, the Equal Credit Opportunity Act forbids age
discrimination in mortgage lending, and two, there are mortgage products now
available which are tailored to those at or near retirement age. This means
that if you qualify for a mortgage, you can get one even if you are in your 80s
or older. In other words, your mortgage can be designed to outlive you.
Qualifying for the mortgage can be done the traditional way, with
income from employment or a business, Social Security, monthly pension
benefits, or regular distributions from an IRA or 401k. If income from those
sources add up to an amount sufficient to meet the lender’s criteria, then it
But what about those that don’t have fixed regular income, and
instead take distributions from retirement investments as needed for expenses,
or those whose Social Security and other monthly income is insufficient to
qualify? You now have more options, as lenders have recently created mortgages
that rely on your retirement assets, even if you are not taking regular
distributions. These programs go by various names; asset depletion, asset
annuitization, etc., but their main feature is that the lender will consider
“imputed” income for qualifying purposes. Imputed simply means that the borrower
need not take actual distributions, but instead the lender calculates what the
borrower could reasonably withdraw on a monthly basis.
Both Fannie Mae and Freddie Mac allow lenders to make such loans
to borrowers age 59.5 and older, but they use different formulas. With Fannie,
the total value of retirement assets is first reduced by 30% (to allow for down
markets), then the resulting amount is divided by 360 to get the monthly
imputed income. For example, if your retirement investments are valued at $1,000,000,
that would be 1,000,000 x 70% = 700,000 / 360 = $1944 in imputed monthly
income. Freddie uses 240 months instead of 360, so in this example the imputed
income would be $2917. Freddie also allows the use of non-retirement investment
portfolios, for borrowers ages 62 and older.
Asset based mortgage loans can be a big help for those planning
their finances ahead of retirement – it is one more tool for your financial
toolbox. If you would like additional information on these programs, or if you
wish to discuss how they might fit into your particular financial situation,
please contact Margie. She would be happy to discuss the details with
Quick Credit Guide
Are you thinking about
buying a home? Use this guide to boost your credit score!
Get one or two credit cards
to grow your credit history
Debit cards do not
count towards your score
Use the card/s each month
Pay them off each month
Pay on time
If you cannot get a credit
card, get a secured card by putting money “down” on a bank card
Increase the credit limit on
Keep track of your debt-to-credit
limit ratio. You should aim for a ratio of 30%, but the lower the better.
Don’t close old, paid-off
debt – it looks good on your record (like getting A’s in high school)
Pay off disputes and then
fight them (cable companies, medical bills, etc.)
Limit inquiries on your
Monitor your credit – www.annualcreditreport.com
can give you all three bureaus once a year (checking one bureau every 4 months
will give you an idea of how your credit score is doing).