Millennials locked out of their homeownership dreams by high debt-to-income ratios and student loan debt will soon have reason to take another look at purchasing, thanks to a number of policy changes at Fannie Mae.
First, Fannie Mae recently announced that beginning July 29, they will accept borrowers with debt-to-income ratios, or DTI, as high as 50 percent, up from 45 percent today.
In a recent interview with the Washington Post, Steve Holden, Fannie’s vice president of Single Family Analytics, said that many borrowers have factors beyond DTI that reduce their credit risk, for example making large down payments or holding large cash reserves.
The National Association of Realtors® has pushed the Federal Housing Finance Agency – which has jurisdiction over Fannie Mae – to open the “credit box” for strong borrowers who find themselves sidelined by high fees and excessively strict underwriting.
“We believe any responsible steps that can be taken to open the credit box, especially for young and first-time buyers, will help people enter the market,” said NAR President William E. Brown. “All eyes are on the GSEs and FHA, and it will take efforts like these to avoid leaving creditworthy buyers on the sidelines.”
Brown highlighted the need to protect taxpayers with fiscally responsible policies. The Washington Post reported last week on data from Fannie Mae showing that a “significant” number of borrowers with DTIs between 45 and 50 percent have strong credit profiles and aren’t at risk of defaulting on a loan.
In the push to aid more millennial homebuyers, Fannie Mae also announced changes to the way they treat student debt.
Fannie Mae acknowledged that the way it counts student debt payments against a borrower’s DTI isn’t always reflective of the payment a borrower actually makes on a monthly basis. Instead, the calculation may consider an arbitrary percentage of the loan, which for borrowers on income-driven repayment plans could reflect a significantly higher payment, thus inflating their DTI.
Instead, Fannie Mae will now take a borrower’s actual monthly payment into account when calculating a borrower’s DTI. This change reflects NAR policy on streamlining income-based repayment programs.
Jonathan Lawless, Fannie Mae’s vice president for Consumer Solutions, recently joined the National Association of Realtors® in its Washington Office to explain how these changes will make a difference for young buyers.
“The thing that we hope to see is a lot more borrowers getting that ‘yes’ from their lender and able to become homeowners,” Lawless said.
It’s a welcome change for Realtors®, who for years have studied the effects of student debt on home purchases while pushing the Department of Housing and Urban Development to address the way student debt is calculated in debt-to-income ratios.
Lawless said Realtors® may want to encourage clients who have been sidelined by DTIs to try again when the combination of these new policies is fully in effect.
Video from Lawless’s interview at NAR is available here: