Will tighter Fannie Mae guidelines make a home purchase or mortgage refinance harder to get?

November 07th, 2011

With the release of Fannie Mae 8.0, the mortgage industry has seen tougher underwriting criteria for home refinance and purchase loans.

Updates to credit scoring and debt-to-income requirements

The two biggest changes affect credit (FICO) scores and debt-to-income (DTI) ratios. Borrowers who want to get approved for a mortgage need at least a 620 credit score, up from 580. In fact, many lenders have set their minimum score at 640, 660, or even 680.

Affecting more mortgage applicants for home refinances and purchases is the lowering of maximum debt-to-income or DTI ratios from 50% to 45% of the borrower's gross income. For borrowers earning $8,000 per month, at a mortgage rate of 5%, this reduction in allowable DTI lowers the allowable loan amount by $75,000.

Calculating DTI

Your maximum DTI is determined by multiplying your gross (before tax) income by .45. Then, add up your current monthly credit obligations (minimum required payments on car loans, student loans, credit cards, etc) including proposed monthly mortgage payment, plus mortgage insurance (if applicable), property taxes, homeowners insurance, and association dues (if applicable). If the total is less than your max DTI, you qualify. If it's more, you'll need to pay down your debt, increase your income, or buy a cheaper home.

If you earn $5,000 per month and have a $200 car payment and credit card payments totaling $150, and your proposed total house payment equals $2,150, your DTI ratio would be 50% and you would not qualify. Find a home with a $1,900 payment and you're in business, because $5,000 * .45 = $2,250, and $2,250 - $350 = $1,900.

Use a free mortgage calculator

How does this affect you with mortgage prequalification? Use a free online mortgage calculator--the free mortgage prequalification calculator on this site incorporates thresholds well within the new limits.

Thus, this calculator will give you a safe and conservative estimated purchase price based upon the information you enter. To be most accurate with your home refinance or purchase, consult mortgage professional.


Posted By :

Dennis is co-owner and broker of record for Stratis Financial in Southern California. With over twenty years experience in the mortgage industry he has helped thousands families purchase homes. His Weekly Rate and Market Update keeps his clients and real estate professionals educated and informed on the mortgage industry and the economy. Dennis has a degree in Economics and Political Studies from Pitzer College and is married with two children.

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