Are you about to qualify for a higher loan amount? Buying a home but finding it hard to qualify due to student loans and high car payments? Qualifying for a mortgage will be easier when Fannie Mae increases its back end (total monthly debt) debt-to-income ratios from 45% to 50% on July 29th 2017.

More qualified borrowers on the edge of getting a loan (e.g., first-time home buyers, moderate-income borrowers carrying more debt) could potentially qualify for a higher loan amount.

Debt-to-income ratio is calculated by taking a potential borrower's monthly gross income and dividing it by the borrower's recurring debts such as credit cards and student loans. Banks and mortgage companies use this ratio to figure out if borrowers can afford to make their mortgage payments in a timely manner on a monthly basis.

If you had a lot sitting in the bank (cash reserves) and did financial counseling you may have been able to get the allowance previously. It will now become standard practice to allow a 50% total monthly debt ratio. Not all lenders will make the change but enough will do so to provide some mortgage qualifying relief. Most people want to qualify for the maximum loan amount so this will be a big help. Fannie Mae has also introduced two new innovative solutions for home buyers with student loans. The policies announced recently are as follow:

  • Debt Paid by Others: Widens borrower eligibility to qualify for a home loan by excluding from the borrower’s debt-to-income ratio non-mortgage debt, such as credit cards, auto loans, and student loans, paid by someone else.
  • Student Debt Payment Calculation: Makes it more likely for borrowers with student debt to qualify for a loan by allowing lenders to accept student loan payment information on credit reports.

Income-Driven Repayment Plans

In the past borrowers using an income-driven repayment plan for their student loans found that because those payments could change annually, the lender providing the mortgage could not use that lower payment when calculating the consumer’s debt-to-income ratio.

The new rules allow the mortgage lender to exclude those payments from the mortgage calculation as long as the borrower can supply documentation that a third party, such as an employer or parent, has satisfactorily made the payments for at least the last 12 months.

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