The housing market is booming and it’s a sellers’ market for the summer. Many young professionals are ready to shed their expensive and cramped apartments to buy a home, especially one that costs significantly less than their apartment rental.
This is easier said than done however, as the mortgage application process can sometimes deny mortgages for millennials. Why is this? As Millennials stretch their pay to make it through the month, it causes them to have a larger debt to income ratio. DTI (Debt-to-Income) is the calculation that takes a look at all of your projected debt payment, and then compares that against your income. The number will include mortgage principle, interest, taxes and insurance, also known as PITI. If it falls above a certain percentage, 43% to 45% in most cases, the application is automatically denied.
To give an example of this. Your monthly income is $6000. Your bills, college loan, car loan, and credit card bills come to $2950. As this number is already above 45% DTI, without PITI, you could be denied even if you can afford the mortgage.
Studies by the Federal Reserve have documented that higher DTIs statistically indicate a higher chance of a loan default. Why? Because the more debt you have, the more difficult it is to pay all of your bills. So by keeping the DTI at 45%, it minimizes the risk of default.
However, one of the largest mortgage companies, Fannie Mae, did their own research over the past 15 years and came to the conclusion that those falling in the 45%-50% DTI range continued with good credit and did not default on loans. The result of this study is that they are changing their policy effective July 29, 2017. The 45% DTI ratio will be increased to 50% which can definitely help secure mortgages for Millennials. Does this mean that if you have a 50% DTI that you are automatically approved for a home mortgage loan? Not necessarily. There are many other factors to be considered, including your credit score, how well you pay your other financial obligations, and all of the standard underwriting calculations. If you were previously denied having fallen within that marginal area of good credit but were just a little too high on your DTI, then yes, this new policy will be of great benefit!
There has been another player in the mortgage field that has also allowed the DTI to be higher than the 45%, and even 50% to certain borrowers, FHA Mortgages. One of the down sides to a FHA Mortgage is that they require mortgage insurance to be paid for the entire length of the loan. That can add up to a considerable expense over the course of 15, 20 or 30 years. FHA historically is more generous when it comes to your overall credit score. If your FICO credit score is in the mid-600s and you have a considerable amount of debt with a higher DTI ratio, then FHA may be your main choice.
And the mortgage insurance for Fannie Mae? Because they use private mortgage insurance, they will drop the insurance premiums when the mortgage falls below 78% of the property value, saving you a substantial amount of money.
So in review. To get a home loan, be sure to work down your debt as much as possible, lower than 50%. Work on keeping your FICO credit score above 650, and save up for a down payment on your new home.
In the coming weeks we will be sharing more information to help young adults fulfill their dream of owning their first home, including more information on mortgages for Millennials. Stay tuned!
Tagged With: Fannie Mae, fha mortgage, loans, millennials, mortgages
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