Fannie Mae Loosens Debt to Income Ratios in 2017
Updated July 29th, 2017
A major move to make conventional loans more widely available will come in the form of higher debt to income ratios beginning the weekend following the July 29th update.
The Fannie Mae debt to income ratio guideline states that loans underwritten through DU, DU determines the maximum allowable DTI ratio based on the overall risk assessment of the loan.
Using version 10.0, DU will apply a maximum allowable DTI of 45%, with flexibilities offered up to 50% for certain loans with strong compensating factors.
These compensating factors has always been kind of hit and miss. In my experience, you needed a minimum of 20% down payment or equity to get the exception. It also favored higher credit scores and reserves.
All of these compensating factors contribute to more paperwork, and greater demand on your financial made it a rare exception, it was not
Fannie Mae – Debt to Income Ratio Changes
The maximum allowable debt-to-income ratio (DTI) in DU will be adjusted in DU Version 10.1.
Under the adjustment, DU will consider applications with a maximum DTI of 50%. For DTIs above 45% and up to 50%, DU will no longer require certain additional compensating factors.
If the DTI on loan exceeds the maximum allowable DTI of 50%, the loan will receive an Ineligible recommendation.
The big change here is that the compensating factors above 45% has been removed.
How to Calculate Your Debt to Income Ratio
Your debt to income ratios is your total monthly expenses as a percentage of your income (expenses divided by income). Your income is going to be calculated differently, depending on how you get paid.
Income – Not Self Employed
If you are paid by the hour or receive a set salary, taxes are being taken out, and you receive an IRS W2 tax income statement from your employer, you are not self employed.
Your income will be calculated in one of these ways:
- Average monthly normal income as determined on 30 days pays stubs. Does not include commission, overtime or bonuses.
- Commission, overtime or bonus income must be documented to show a history of receiving it for 2 years, then must be averaged over those 2 years to determine an average monthly value of bonuses or overtime or commission.
Your qualifying income is going to be calculated using your gross income before taxes, minus your monthly obligations.
Income – Self Employed
If you have ownership in your business or are paid by a IRS 1099 earnings statement, you are self employed.
Self employment income qualification typically requires a minimum of a 2 year history of being self employed as documented by business license and tax records.
Under the right circumstances, both Fannie Mae and Freddie mac will allow you to use your Net income from the most recent year as qualifying income, as opposed to the more common two year average.
Read More: Current Self Employed Income Guidelines
What is counted as debt in my debt to income ratio?
The total monthly obligation is the sum of the following:
- the monthly housing expense of the borrower’s principal residence (or the qualifying payment amount if the subject mortgage loan is secured by the borrower’s principal residence;
- the qualifying payment amount if the subject mortgage loan is secured by a second home or investment property;
- monthly payments on installment debts and other mortgage debts that extend beyond ten months;
- monthly payments on installment debts and other mortgage debts that extend ten months or less if the payments significantly affect the borrower’s ability to meet credit obligations;
- monthly payments on revolving debts;
- monthly payments on lease agreements, regardless of the expiration date of the lease;
- monthly alimony, child support, or maintenance payments that extend beyond ten months;
- monthly payments for other recurring monthly obligations; and
- any net loss from a rental property.
Debt to Income Limits by Loan Type
The debt to income ratio limits vary from one type of loan to another. The changes we are reporting on here are to the Fannie Mae conventional underwriting guidelines.
- Fannie Mae DTI Limit – 50% (After July 29th, 2017)
- Freddie Mac DTI Limit – 45% to 50%
- FHA DTI Limit – 46.99% housing payment / 56.99% including monthly liabilities
- VA DTI Limit – Determined by automated underwriting system
- USDA DTI Limit – 42% or higher with compensating factors determined by automated underwriting system
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