As of June 25, 2018, we’ve made some changes to the way our mortgage approvals work. You can read more about our Power Buyer ProcessTM.
Fannie Mae has rolled out some new changes to its policies recently. Often, when a change is made, it either helps or hurts people who might be trying to qualify for a mortgage. The changes we’re going to write about today definitely help.
As part of the guideline modifications Fannie Mae has rolled out, clients can now qualify with a slightly higher debt-to-income (DTI) ratio. You’ll also be able to make a lower minimum down payment on an adjustable rate mortgage (ARM).
If you’ve applied in the past and were denied based on one of these factors, it may be time to apply again. Let’s go over what these changes mean on a practical level. We’ll touch on the DTI piece first.
Higher DTI Limits
Fannie Mae has updated its DTI guidelines to accept ratios as high as 50%. This could help expand the number of people who qualify to get a mortgage.
Your DTI ratio is a measure of how much of your monthly income goes toward debt payments. It takes into account both installment debt like house and car payments and the revolving debt associated with credit cards. Figuring out your DTI is pretty simple. Let’s go over a scenario to show you how this works.
Let’s say you make $48,000 per year right now ($4,000 per month). Your student loan payment is $600 every month. You pay $300 per month for your car. Your rent is $800. You make total payments of $250 each month on your credit cards. To get your DTI, you compare your monthly debt payments to your income ($1,950/$4,000). In this hypothetical, your DTI would be 48.75%, and you may qualify under the new guidelines.
Lower Down Payments on ARMs
For its second major change, Fannie Mae has adjusted the minimum down payment on ARMs to be more aligned with its fixed-rate offerings. As opposed to having to bring 10% of the loan amount to closing, it’s now possible to get an ARM with a down payment of as low as 5%.
Traditionally, we think of a fixed-rate mortgage as the way to go. For many people, this is definitely a very good option. However, it’s not the only game in town and doesn’t make sense for everyone.
According to the National Association of REALTORS®’ most recently available data, the average homeowner stays in their home for 10 years. It’s important to understand that when you get a 30-year fixed-rate mortgage, you’re paying a higher rate in exchange for ensuring the rate stays the same for 30 years. If you plan on putting down roots and making this the last house you buy, it makes a lot of sense to pay a little bit for peace of mind.
If you only plan on being in your home 5 or 10 years, it might be better to take a look at an ARM. Let’s talk a little bit about how they work before going further.
How ARMs Work
Mortgages with adjustable rates typically come in 5-, 7- or 10-year varieties. What you may not realize is that all ARMs have a 30-year term. The number of years referenced by a 5- or 10-year ARM actually refers to how long the rate stays fixed at the start of the term. If you don’t plan on being in the house for long, you might very well be ready to sell the property before the rate ever adjusts.
If you’re in the house at the end of the fixed period, your rate will adjust up or down based on where the market is at the time. Typically, they adjust every year until you sell, refinance or pay off the loan.
If your rate adjusts upward, it’s important to note it doesn’t rise indefinitely. There are caps on how much your rate adjusts initially and at each subsequent adjustment. Finally, there’s an upper limit on rate adjustments for the life of the loan.
In an environment of rising interest rates like the one we’ve just entered, ARMs tend to enjoy increased separation from the higher rates offered by fixed-rate loans. For that reason alone, an ARM could be worth taking a look at, particularly now that you can make a lower down payment.
If these changes by Fannie Mae have you thinking about your options to purchase a home or refinance, you can get a preapproval or complete refinance approval online through Rocket Mortgage® by Quicken Loans®. If you’d rather get started over the phone, one of our Home Loan Experts would be happy to take your call at (800) 785-4788. If you have any questions for us, we’d be happy to answer them in the comments.
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