As the GSEs seek to ease access to credit and allow more homebuyers into the market, Urban Institute pointed out one change that could allow nearly 100,000 new homebuyers to qualify for a mortgage each year.
Earlier this year, mortgage giant Fannie Mae announced it was raising its debt-to-income ratio to further expand mortgage lending. The GSE raised its limit up to 50%, up from the previous limit of 45%. Even under the only limit, Fannie Mae allowed for flexibility up to 50% DTI for certain case files with strong compensation factors.
However, that flexibility was almost always offered to mortgages with loan-to-value rations lower than 80%. This new increase is significant as increasingly, 3% down payments are becoming the new normal, even on conventional loans.
Urban Institute estimated that 95,000 new loans will be approved each year due to Fannie Mae’s DTI increase, it stated in a report written by Edward Golding, Laurie Goodman and Jun Zhu.
The report also explained a disproportionate share of the new loans will go toward black and Latino families as they are 1.5 times more likely to have DTI ratios above 45%.
The new loans will also be riskier as the probability the mortgage will fall into default increased 31% for those with DTI ratios between 45% and 50% when compared with the median DTI level of 35%.
The increase in the DTI ratio will also allow Fannie Mae to purchase 3.4% more loans. Fannie Mae estimated that between 3% and 4% of recent applications were approved by the AUS and held DTI rations between 45% and 50%, but were ineligible due to additional overlays.