Written By: Joel Palmer, Op-Ed Writer
As the summer home buying season gets into full swing, mortgage underwriters will soon be able to approve more Fannie Mae-supported loan applications.
The upcoming version of Fannie Mae’s Desktop Underwriter (DU) program will include a increase in the maximum allowable debt-to-income (DTI) ratio for borrowers.
As of July 29, loans submitted through DU can have a DTI up to 50 percent, up from the current 45 percent.
According to many observers and analysis in a recent Washington Post article about the change, the increase in the DTI will help a significant number of potential homebuyers better qualify for a loan.
This is especially true for millennials who are just starting out after college. Not only are they saddled with a large amount of student loan debt, they are typically earning entry-level income.
“The thing that we hope to see is a lot more borrowers getting that ‘yes’ from their lender and able to become homeowners,” said Jonathan Lawless, Fannie Mae’s Vice President for Consumer Solutions.
The National Association of Realtors agreed that the increase in allowable DTI ratios will help young homebuyers. NAR has also been pushing the Federal Housing Finance Agency to “open the credit box for strong borrowers who find themselves sidelined by high fees and excessively strict underwriting.”
“We believe any responsible steps that can be taken to open the credit box, especially for young and first-time buyers, will help people enter the market,” said NAR President William E. Brown. “All eyes are on the GSEs and FHA, and it will take efforts like these to avoid leaving creditworthy buyers on the sidelines.”
NAR also applauded Fannie Mae’s recently announced change to how it treats student loan debt. The agency has traditionally used an arbitrary percentage of student loans, which often inflated a borrower’s DTI. Fannie will now instead use a borrower’s actual monthly payment when calculating DTI.
While the DTI change is good news for mortgage processors and underwriters, as well as their clients, some question whether it’s a prudent idea to lower mortgage borrowing requirements.
DTIs are scrutinized by mortgage underwriters more than any other factor, and high ratios are a leading cause of mortgage application denial. But it’s also fair to note that adding a mortgage on top of a high debt load increases the risk of loan default.
According to the Washington Post article, Fannie Mae officials are comfortable with the change. Their research indicated that many borrowers with DTIs between 45 percent and 50 percent have good credit and not prone to default. Many have adequate downpayment and/or reserve funds to offset any risks from having a higher DTI ratio. Plus, Fannie Mae pointed out that having a DTI of 50 or under doesn’t automatically qualify somebody for a home loan; income, credit scores, and LTV ratios will still be strongly considered.
In addition to the change in DTI, version 10.1 of Fannie Mae’s DU will also align the maximum allowable LTV rations for ARMs with those of fixed-rate mortgages, up to a maximum of 95 percent.
Another update is the criteria that determines the documentation required to verify a self-employed borrower's income. This change will increase the number of DU loan casefiles eligible for the one year of personal and business tax return documentation requirements.
Recent amendments to the Home Mortgage Disclosure Act that affect the collection of a borrower’s ethnicity, race and gender will be supported by Version 10.1.
About the Author
As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.