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Fannie Mae will be updating its automated underwriting system to take new guidelines into account starting on December 8, 2018. There will be key changes for those who are looking to take cash out of their home.

We’ll be taking a deeper dive into the changes and exactly what they mean below, but a good place to start would be the fact that clients with higher debt-to-income ratios (DTI) will have to take slightly less cash out to accomplish their goals or have more savings on hand.

Clients wishing to have their application considered under the current guidelines should take the opportunity to get started.

Tighter Cash-Out Refi Guidelines

Fannie Mae will release version 10.3 of its automated underwriting system Desktop Underwriter this Saturday, December 8. This system allows lenders and Fannie Mae to quickly determine if you qualify for a mortgage loan through the investor based on the qualification information you provide.

Among the major changes coming in this release are some significant changes to guidelines for higher DTI cash-out refinances. If you’re getting a Fannie Mae loan with a DTI of higher than 45%, you’ll need to show the ability to cover at least six months’ worth of mortgage payments, also known as reserves. Your full mortgage payment includes not only principal and interest, but also property taxes, homeowners insurance and homeowners association dues, if applicable.

As an example, let’s say your monthly mortgage payment was $1,200 in total. Fannie Mae would require you to show available assets of at least $7,200. This helps mitigate the risk for the lender and investor in the mortgage by showing that you would be able to make your house payment in the event of a short-term income loss or other emergency impacting your finances.

DTI compares your monthly debt payments on installment and revolving debts to your monthly income. In order to better understand DTI, let’s run through a quick scenario.

DTI Example

I hated story problems in math class, but I’m going to take you through one step by step.

Your annual income is $72,000. You have a $400 car payment, $1,500 house payment and a $700 student loan payment. In addition, you also have revolving credit card balances totaling $200 per month. What’s your DTI?

First, convert your income to a monthly figure ($72,000/12 equals $6,000). Next, add up your monthly expenses ($2,800). Then divide your monthly expenses into your monthly income. ($2,800/$6,000= 46.67%).

In that example, you would have to have six months’ worth of reserves. You could avoid this requirement by taking less cash out, making for a lower loan amount and a cheaper mortgage payment.

Other New Risk Assessments

Although the cash-out refinance reserves requirement is maybe the most visible change in the new guidelines, it’s not the only one.

Housing Expense Ratio

Like DTI, your housing expense ratio is another way lenders and mortgage investors like Fannie Mae determine the relative risk associated with making a loan to clients.

This ratio compares your monthly mortgage payment to your monthly income without taking into account your other debts.  Borrowing numbers from our DTI example, the housing expense ratio in the scenario above would be 25% ($1,500/$6,000). As with DTI, a lower housing expense ratio is considered more positive for your approval prospects than a higher ratio.

You may hear lenders refer to both of these ratios when talking about your loan application. The housing expense ratio is often referred to as a front-end ratio, while DTI, calculated after other debts are added, is considered a back-end ratio.

These key ratios will have an effect on the amount of cash those looking to refinance can take out of their home. If you’re ready and would like your application considered under current guidelines, you can apply today with Rocket Mortgage® by Quicken Loans. One of our Home Loan Experts would also be happy to work with you if you give us a call at (800) 785-4788. If you have any questions, you can leave them for us in the comments below.

This Post Has 6 Comments

  1. We own a 2-unit property as primary, and will be doing a cash-out to consolidate debt. I’m being told that we will require 6-months’ reserves simply because it’s a 2-unit. Our DTI is well within the margins. We can increase the cash out to cover the reserves? Thanks.

    1. Hi Joseph:

      Increasing the amount of cash you take out wouldn’t help cover the additional reserves. Increasing the amount of cash taken out would actually increase your loan amount which has the effect of raising your monthly payment and increasing the amount of reserves you would actually pay. If you’re not doing so already, I recommend speaking with one of our Home Loan Experts who can be reached at (888) 980-6716 to go over your options more fully and see if we can find a potential solution for you.

  2. “Borrowing numbers from our DTI example, the housing expense ratio in the scenario above would be 20.83% ($1,500/$7,200).” I believe the denominator is $6,000, which changes the ratio result.

    1. You’re right. That’s our mistake. I’m going to work on getting that changed. The correct percentage for the example is 25% when we change the denominator to $6,000. Thanks for the eyes! We really appreciate it!

  3. I like to lower house payments without sending all stuff thur mail.Need 6 or 8 check stubs plus other stuff always.Rate on house loan is 6.85%.Payments are 865 now would like to lower them if possible without a lot of hassle. HOW hard would it be over phone…and what information you need.

    1. Hi Gail:

      We have an online process, so it wouldn’t be necessary to mail a ton of stuff. We would need things like tax returns, W-2s, pay stubs and bank statements, but we have a process for you to share all that with us digitally. If you want, you can get started with Rocket Mortgage or give one of our Home Loan Experts a call at (888) 980-6716. Hope this helps!

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