Mortgage

Fannie Mae raises debt-to-income ratio to further expand mortgage lending

Study finds borrowers with 50% DTI not prone to default

Fannie Mae announced it is preparing to raise the debt-to-income ratio, the No. 1 reason that mortgage applicants get rejected, according to an article by Kenneth Harney for The Washington Post.

The largest population rejected due to high DTI ratios is Millennials, who often stretch to pay their rent early in their careers, according to the article. Fannie Mae is now looking to allow more homeowners to enter the market as it increases its DTI requirements.

From the article:

But here’s some good news: The country’s largest source of mortgage money, Fannie Mae, soon plans to ease its debt-to-income (DTI) requirements, potentially opening the door to home-purchase mortgages for large numbers of new buyers. Fannie will be raising its DTI ceiling from the current 45 percent to 50 percent as of July 29.

DTI is a borrower’s total amount of debt, including credit cards, student loans, auto loans and mortgages, versus their total income. However, Fannie Mae might be increasing its DTI ratio, but qualified mortgages still need a DTI of 43%.

But how safe will these new loans be? Many have reservations about lending at higher DTIs. But according to Fannie Mae, there is nothing to worry about when increasing the DTI from 45% to 50%.

From the article:

Using data spanning nearly a decade and a half, Fannie’s researchers analyzed borrowers with DTIs in the 45 percent to 50 percent range and found that a significant number of them actually have good credit and are not prone to default.

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