Getting A Loan Just Got Tougher: Fannie Mae Changes Debt To Income RatioPosted by The MyHomeHouston Team on Friday, December 4th, 2009 at 2:23am.
So the government is offering an 8k tax credit to help the real estate market recovery. There have been a lot of debates back and forth about whether the government should be spending this much money to help bolster the troubled real estate market. I don't want to get in to those arguments here. Suffice it to say that the 8k tax credit is very expensive but at the same time it is helping the housing market. So why would the government spend all this money and at the same time allow rules to be put in place which would effectively negate some of the positive impact of the tax credit.
Fannie Mae recently announced changes to debt to income rules. The debt to income ratio is basically how much debt payments one can have a month compared to their income.
Currently someone can get approved when their debt to income (DTI) ratio is 55% in some cases someone can be approved when their DTI is 60%. This basically means if someone makes $1000 a month they can have $550 in debt including their mortgage payment. Starting December 12th Fannie Mae is implementing new rules where the Max debt to income is 45%.
So let’s run some numbers. Let’s assume buyer X makes 60k a year (or 5k a month) and has $500 in debt a month.
Under the old rules they could have a monthly payment of 2250 [ (5000 x .55) -500 = 2250 ]
Under the new rules they could have a monthly payment of 1750 [ (5000 x .45) -500 = 1750 ]
So how does this affect what kind of house buyer X can get approved for? It depends on interest rates and taxes but in the past buyer x could afford a house for roughly 312,000 and now they can afford a house for 251,000.
Now it might be wise to change the DTI at some point. The issue is that now, when we are in the beginning stages of a housing recovery, is probably not the time to add restrictions that could depress a housing recovery. And if we are spending billions of dollars on the tax credit to get more people to purchase homes it seems like an odd move to put in place rules to make it more difficult.
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