November 15th, 2018 6:10 AM by Jackie A. Graves
hurdles to qualify for a mortgage used to be much harder. House hunters with
too much debt had their home-buying hopes dashed after being denied a mortgage.
changing as mortgage lenders ease lending guidelines to expand mortgage credit
to more people.
with a high debt-to-income ratio now have more leeway than since the subprime
mortgage meltdown of a decade ago. Your debt-to-income ratio, or DTI, is the percentage of monthly income you
pay toward your monthly debts, including a new mortgage payment. It’s a key
factor — along with your credit — that lenders use to determine whether you can
repay a loan. The more debt you have, the higher your DTI ratio —
and that’s a red flag for lenders evaluating your potential for risk.
advocates worry that borrowers who are already struggling to stay afloat might
get in over their heads with today’s laxer lending requirements. On the flip
side, expanding access to mortgage credit could help creditworthy borrowers in
higher-priced housing markets join the homeownership ranks they’ve increasingly
been shut out from.
How getting a mortgage has gotten easier
Mae and Freddie Mac, two government-sponsored enterprises that back most U.S.
mortgages, have eased their lending rules in recent years. Fannie Mae increased
its maximum DTI ratio to 50 percent, up from 45 percent, in July 2017. Both
agencies allow borrowers to finance up to 97 percent of a home’s purchase
price, which is considered a high loan-to-value ratio.
lenders charge higher interest rates on high DTI loans to mitigate their risk.
They also require a higher FICO score and more cash reserves.
DTI limits is just one way lenders have made it easier to get a mortgage. LTV
ratio increases help borrowers who don’t have a large down payment. However,
you’ll pay private mortgage insurance when you put less than 20 percent down —
and you might not be able to borrow as much as you need to buy a home.
conventional lenders have rolled out their own low down-payment programs
without private mortgage insurance in exchange for a higher interest rate.
Government-insured loans require little to no down payment, and generally have
more relaxed credit score requirements than conventional loans.
Mortgage credit standards still tighter than boom times
who don’t fit into a pristine credit box now have more options, Joel Kan,
associate vice president of industry surveys and forecasting with the Mortgage
Bankers Association. There’s more balance to the lending equation nowadays
after the regulatory pendulum swung too far in the opposite direction — a move
that shut out otherwise capable borrowers, Kan says.
standards have loosened considerably in recent years, today’s lending practices
are still more stringent than they were before the housing crisis. The days of
doling out loans without verifying income or employment are long gone.
still about one-quarter of where we were compared to the pre-housing boom,”
says Kan of mortgage credit accessibility. “Standards are looser now than they
were from 2010 to 2012 when credit access was the tightest, but it’s not
share of new, conventional conforming home-loans with a DTI ratio above 45
percent spiked after Fannie Mae raised its DTI limit, according to research
from CoreLogic. From early 2012 up until last summer, the share of these high
DTI loans held steady between 5 percent to 7 percent. In the first quarter of
2018, that share nearly tripled, jumping to 20 percent, CoreLogic found. The
average DTI ratio for these home loans rose by two points to nearly 37 percent
from Q1 2017 to Q1 2018.
as high DTI loans gain popularity, lenders haven’t budged on credit score
standards. Borrowers’ average credit score for conventional, conforming
purchase loans remained unchanged at 755 in the first quarter of 2018 compared
to the same period a year ago, CoreLogic found. That’s significantly higher
than homebuyers’ average credit score of 705 in 2001 — before the downturn.
Expansion of mortgage credit has its drawbacks
DTI and LTV loans aren’t without risks. A high LTV ratio increases
borrowing costs, and you’ll likely have to pay mortgage insurance to offset the
starters, lenders calculate your DTI ratio using your gross monthly income
(before taxes and payroll deductions) and debts that appear on your credit
report. They’re not including monthly expenses like groceries, gas, auto or
health insurance, daycare/tuition, utility bills and other recurring bills that
can eat up a good chunk of your monthly budget, says Rebecca Steele, CEO and
president of the National Foundation for Credit Counseling.
puts some borrowers in a more precarious position,” Steele says of high DTI
loans. “Today, people have significantly less savings in reserve. To have that
you need a stable income, and some consumers struggle with that. Most people
have little disposable income, especially because rents are going up.”
job loss or other major financial hardship could land you in a tighter spot
than if you had paid down your debt and shored up your emergency savings fund
before buying a home. You’ll also pay more interest with a high DTI loan,
key issue that some first-time buyers overlook are the hidden costs of
homeownership, says Jeff Levine, a certified financial planner with BluePrint
Wealth Alliance in Garden City, New York. When you’re stretching your income to
cover monthly debt payments, you won’t have as much cash on hand for
maintenance expenses, homeowners association dues, and major repairs that
inevitably pop up, he says.
should factor those expenses into the mix and avoid overextending themselves,
because you can get approved for a mortgage doesn’t mean you should get one,”
Levine says. “People got into trouble [in the downturn] because they borrowed
up to the hilt and didn’t have the capacity to repay.”
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