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Fannie Mae debt to income ratio guidelines

Fannie Mae Loosens Debt to Income Ratios in 2017

Updated July 29th, 2017

In a May 20th announcement, Fannie Mae released a sneak peek of it’s 10.1 update of the DU (desktop underwriter) automated underwriting system.

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.

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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.

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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.

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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.

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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

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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.

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  • 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

Getting Your Questions Answered

All lenders are not created equal.  Most of the readers that find this site because they’ve been researching solutions to challenges, and have been told 10 different things by 10 different loan officers.

We’ve created this resource to help you sift through the endless opinions and articles that may, or may not directly answer your question correctly.

There are several ways to ask questions, and get expert opinions on this website.

  • Submit a Question:  On the bottom of this page, you’ll see a prompt that allows you to ask questions.  These questions come directly to me and are answered very quickly.
  • Leave a Comment:  Below every article is the option to leave a comment or question.  We see these comments and questions in real-time and the always answered, usually pretty quickly.

In addition to researching your questions and providing you with expert advice, I can also introduce you to a lender friend that I know has experience with your specific situation and can help.

About Your Expert

Scott Schang

As a 19 year veteran of the Mortgage and Real Estate industry, I am passionate about educating and empowering consumers. I have been writing about consumer protection issues, and making sense of complicated real estate and mortgage topics on this website since 2007

Leave a Question or Comment About this Topic

  • Frank Rips says:

    Hi Scott Schang, I had a lender tell that I can do a conventional loan (Freddie Mac) using 1 year tax return (self-employed) and have a payment arrangement for my 2017 tax’s added to my debt and still qualify. Is this possible? another lender told me it was not possible to use 1 year tax’s to qualify and pay a monthly payment towards my 2017 tax’s. I don’t know who to believe, can you please help answer my question. Thank You in advance.

    • Hi Frank,

      Freddie Mac used to be pretty flexible with 1 year tax returns until last year. They changed their guidelines to include the additional criteria of having been in business for a minimum of 5 years.

      Fannie Mae has also loosened up their Self Employed guidelines to allow 1 year tax returns. Both Fannie and Freddie only allow 1 year tax returns as determined by the automated underwriting system.

      It is also accurate that you can factor in the IRS payment as part of your liabilities when calculating your debt to income ratio.

      If you would like a second opinion from someone that I know and trust, and has experience with self employed guidelines, I would be happy to make an introduction. Shoot me an email to scott@findmywayhome.com if you would like a second opinion (or third?).

      There is nothing that you’re being told that’s jumping out at me as being mis-guided or inaccurate. Again, just run DU and LPA and see what they come back with. If you have limited reserves and lower credit scores, you are less likely to get a 1 year income decision.

      Hope this helps?

  • Sam says:

    Will the DTI limits on 10.1 be the same whether it is an SFR or a condominium?

  • DeeDee says:

    I make 4700 monthly gross income. I live with my mother and I pay her $500 monthly. I have very little revolving debt totaling about $100 for 4 trade lines. I’m currently in a chapter 13 bankruptcy in which I’ve already received a letter stating I could purchase a home. But I have student loan debt that totaling $313,000 at 1% does this put me over the 50% DTI? And , I have a580 credit score…

    • Hi DeeDee,

      Your debt to income ratio is calculated by dividing your total expenses, including your new housing payment by your gross monthly income. This is the percentage of your total gross income that is considered the “debt” in the equation.

      If you had to use 1% of your student loan balance, that payment alone is 67% of your gross income. With $4,700 a month gross income, I would think that you would be eligible for an income based payment?

      You also have a little bit of work to do on your credit score. You will need a minimum 620 credit score to qualify for the loan program that allows you to use an income based payment.

      Conventional guidelines are also going to require that your Chapter 13 has been discharged for 2 years before being eligible for traditional financing.

      It sounds like you’re still a couple of years out, but I would be happy to introduce you to a lender that can help you with your credit, and guide you through the process of getting yourself in a position to buy a home in the near future.

      Hope this helps?

  • Matt says:

    Can this scenario go Fannie:

    $950,000 purchase price

    20% down ($760k loan amt)

    47DTI
    720+ credit

    6 months PITI reserves

    • Hi Matt,

      The challenge with this scenario is that your loan amount will exceed Fannie Mae’s maximum loan limit. In “High Cost” Counties like we have in my home State of California, the MAX conventional loan limit is going to be $636,150. In this case, you use a conventional loan up to $636,150 (or whatever it is in your State/County) and bridge the difference with a 2nd mortgage.

      Under the scenario you’ve described, I believe that you would be allowed a 50% dti with both Fannie Mae and Freddie Mac.

      If you shoot me an email to scott@findmywayhome.com, I can introduce you to a lender that can has experience wit these programs.

      Hope this helps?

  • Mindy says:

    Will DU allow cashout refinances to go over 45% DTI or is this limited to purchases and limited cash out loans?

    • Hi Mindy,

      There is no mention of decision bias between purchase or cash out refinances. The new version of DU will go into effect over the weekend of July 29th, 2017, so until then we will not know for sure. My interpretation is that the Maximum DTI will increase for any standard DU decision.

      Here is the exact wording of the announcement:

      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 a loan casefile exceeds the maximum allowable DTI of 50%, the
      loan casefile will receive an Ineligible recommendation.

  • Christine Leveille says:

    When can I qualify for a mortgage after a short sale?

    • Hi Christine,

      Fannie Mae will allow you to buy in 4 years from a short sale, unless the mortgage was included in a bankruptcy. If it was included in bankruptcy, it’s 4 years from the bankruptcy discharge date, you can ignore the short sale date.

      FHA financing will allow you to buy in 3 years from the short sale date.

  • Judy says:

    How do qualify for mortgage after deed in lieu almost 3 years ago

    • Hi Judy,

      Unless the mortgage was included in a bankruptcy, the soonest you would be eligible to use traditional financing to buy a home would be 3 years from the deed in lieu using FHA financing. Conventional (Fannie Mae) financing will require a 4 year wait from the date your name was removed from title.

      Hope this helps?

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