When preparing for a closing on your refinance or home purchase, one of the documents you will be provided with a few days before closing is a HUD-1 Form. This form provides you with valuable information about your loan.
A criteria change announced by Fannie Mae could make it easier for some borrowers to qualify for a mortgage loan in Washington State. Specifically, this change has to do with the borrower’s debt level. It allows for a higher level of combined debt (up to 50%), particularly for those borrowers who have student loans they are paying off.
Getting Easier to Get a Mortgage Loan in Washington?
Fannie Mae is one of the two government-sponsored enterprises (GSEs) that purchase and sell bundled mortgage loans via the secondary mortgage market. Freddie Mac is the other.
These two organizations have specific underwriting criteria for the loans they buy, and those criteria “trickle” down into the primary market where loans are generated. In other words, the mortgage requirements and rules set forth by Fannie Mae and Freddie Mac can directly affect a borrower’s ability to qualify for a home loan.
That’s why this recent announcement by one of the GSEs has generated headlines. They have announced that they will allow a higher level of debt for borrowers. This means that some people who might have been denied for a mortgage loan in the past could qualify in the near future. And going forward, it broadens the pool of potential borrowers.
Specifically, Fannie Mae is increasing their debt-to-income ratio limits from 45% to 50% of pretax income. While this change could impact a lot of home buyers and mortgage shoppers in Washington State, it is primarily designed to aid those with student loan debt.
Rule Change: Debt Ratio Limit Increased from 45% to 50%
To understand the potential benefits to borrowers, you must first understand how debt-to-income (DTI) ratios work.
These ratios are one of the most important qualification criteria for borrowers seeking a mortgage loan in Washington State. The DTI ratio essentially compares the amount of money you earn to the amount you spend on your recurring debts.
In this context, we are talking about the total or “back-end” debt ratio. It looks at all of the person’s combined debts – car payments, credit cards, student loans, as well as the mortgage loan they are about to take on.
In the past, Fannie Mae has imposed a debt-to-income ratio limit of 45% for most mortgage borrowers. There are exceptions to these requirements, but that was the general threshold applied to most lending scenarios. Going forward, they have announced they will increase the DTI limit to 50%.
Doug Duncan, chief economist for Fannie Mae, said that this change represents a small risk that could improve access to mortgage loans for many borrowers.
“In this case, we are changing the underwriting criteria, and we think the additional increment of risk for making that change is very small,” Duncan said.
Of course, the debt-to-income ratio is just one of the qualifying criteria for home loans in Washington State and elsewhere across the country. There are other important factors as well, including a person’s credit score and financial history.
With that being said, the amount of debt a person carries can affect their ability to qualify for a mortgage loan. So this guideline change being made by Fannie Mae could help a lot of Washington State mortgage borrowers qualify for financing.
Have a mortgage question? Sammamish Mortgage is a family-owned mortgage company located in the Seattle metro area. We serve the entire state of Washington, and we offer highly competitive rates on a variety of loan products. Please contact us if you have questions about qualifying for a mortgage loan!