The No. 1 reason so many millennials struggle to buy the first home comes down to the “D” word. I’m talking about debt and, specifically, a person’s debt in relation to income. Too often, I see young people turned away because they are burdened by student loans, car payments or other bills that never seem to go away month after month.
Turns out, Fannie Mae recognized the same issue. That’s why, starting next Saturday, Fannie Mae plans to lessen its debt-to-income restrictions. Fannie Mae will raise its DTI ceiling from the current 45 percent to 50 percent.
Five percent might not seem like a big increase, but in the mortgage world it’s huge news. The change may allow thousands of people to qualify who previously would have been shut out of the housing market.
Now seems an appropriate time to take a deeper look at debt-to-income . In short, DTI is when the lender takes into account all of your monthly obligations, like car payments, student loans, credit cards and child support. The lender also includes your estimated mortgage payment as part of your debt. The lender then compares your total debt to your monthly gross income.
Unlike your landlord, who many not care about your other financial obligations, your mortgage lender wants to see your entire financial picture. We want to make sure you can pay for your mortgage as well as other items. The bottom line: We need to know you’re not over-extended financially.
How do you determine your own DTI?
It’s simple. Add up all of your monthly debts and divide the number by your monthly income. If the number is below 50 percent, then you may stand a better chance of qualifying for a mortgage. You may also want to think about a monthly mortgage payment you can handle given your debt and income.
Keep in mind that DTI is only one factor in becoming approved for a home loan. A lender will also look at the following items:
- How much of a down payment you plan to make
- Credit score
- Previous credit history
If you think your DTI ratio is more than 50 percent, the best course is to determine the debts you can pay off first. Prioritize your finances and set goals to eliminate debt one item at a time.
Also, realize that if you have DTI above 50 percent, you still may be able to buy a home. You might opt for a larger down-payment or purchase a lower-priced home.
In any case, Fannie Mae’s allowing a higher DTI will enable more people to qualify for and own their first home. And that’s great news for homebuyers across Hampton Roads.
Starting next Saturday, reach out to a mortgage lender and see if the new rule makes homebuying a reality for you and your family.
Shikma Rubin is a loan officer at Tidewater Home Funding in Chesapeake (NMLS #1114873). She specializes in lending for the millennial generation. Sign up today for Shikma’s free webinar, “First-Time Homebuyer Crash Course,” at shikmarubin.com/webinar. You can reach her at firstname.lastname@example.org or 757-490-4726.