With the first-time home buyer tax credit extension comes a new crowd of borrowers, looking for a new home and a new loan. 

However, home buyers are going to be experiencing tightening guidelines if they’re looking for a conventional loan. Fannie Mae recently announced a change in requirements for the debt-to-income ratio in home buyers who choose a conventional loan.  How does this affect you?

Well, with the exception of FHA and VA loans, most loans are considered conventional  including 15 and 30-year fixed, as well as the 5-year ARM.

So, if you want a conventional loan, there may be some difficulty starting after December 12th, 2009.  To qualify for a loan amount, lenders use various factors to determine your eligibility.  Among them, is the debt-to-income ratio. 

Here’s how it’s calculated:

Total gross income per month:

Total debt per month:
Credit card payment (from amounts owed): $200
Car payment: $300
Mortgage (the one you’re applying for): $400
Student loan payment: $200
Total debt payments per month: $1,100

To calculate your Debt-to-Income ratio, simply divide your debt by the income:
$1,100/$2,000 = 0.55 or 55%

Previously, Fannie Mae approved debt-to-income percentages of up to about 55%, and in rare cases, a higher percentage was accepted.  However, after December 12th, the new guideline is going to be 45%.  So in the above example, the homeowners would not be able to get a conventional loan.  Keep in mind that you would only calculate what debt you have, so costs such as electric bills or car insurance would not count as it is not debt.  The monthly payments figured in are also the absolute minimum payment amounts, so if you pay extra every month, that amount would not be figured into this ratio.

Of course homeowners who do not qualify for conventional loans can also apply for FHA loans, which continues to have the same low down-payment requirements, as well as the flexible credit requirements.  Homeowners concerned about this more restrictive requirement can also apply for a loan, and go through the underwriting process before this change takes place on December 12th, 2009.  For more information on the underwriting process, check out How Much Home Can You Really Afford?

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