Two big changes from major players in the United States real estate market just made it easier for millions of Americans to qualify for a mortgage. These changes affect both credit scores and debt levels. Credit and debt are both factors that play a large role in whether prospective homebuyers qualify.
Changes to Credit Reporting
Your credit is monitored by three credit agencies: TransUnion, Equifax, and Experian. These agencies keep tabs on things like overdue payments, bankruptcy, and tax liens. The information they compile is used to create your overall credit score.
The three big agencies recently announced that they would drop tax liens and civil judgments from some consumers’ profiles. Liens and judgments will be dropped if they don’t include all required information, like name, address, and either social security number or birthday. About 7 percent of Americans are currently affected by tax liens or civil judgments. Dropping these elements from a credit report may result in a score bump of up to 20 points. This could be enough to affect mortgage qualification.
Want to know if your credit recently got a boost? You can get a free credit report by heading to www.annualcreditreport.com to see where you stand.
Changes to Qualifying Debt Levels
In addition to your credit, your debt-to-income ratio will be one of the major things any mortgage lender will look at when qualifying you for a loan. A lender will add up all of your monthly debts (think credit cards, car payments, student loans, and your potential mortgage payments—but not ongoing bills like your cable bill).
They will compare that monthly debt to the amount of money you make before taxes each month. If you have $3,000 in monthly expenses, including your mortgage, and $8,000 in gross monthly income, your DTI is 43.75%. You calculate that figure by dividing $3,500 by $8,000.
Government-sponsored enterprises Fannie Mae and Freddie Mac, which buy many of the mortgages in the United States, each set requirements for the loans they buy. Borrowers must meet these requirements to get a mortgage that qualifies for purchase and guarantee by either entity.
Traditionally, Fannie Mae and Freddie Mac have required that a borrower’s debt-to-income (DTI) ratio be no higher than 45 percent for a qualifying mortgage. According to the Washington Post, high debt levels is the number one reason that prospective buyers get turned down for a mortgage.
Recently, both announced that they would up their qualifying DTI to 50 percent to account for the large number of borrowers who now have student loans. The new changes took effect July 29.
Borrowers who take advantage of these new looser DTI requirements should carefully look at what their monthly payments will be to make sure they feel comfortable paying all of their ongoing bills while still having enough money left over to live comfortably. An easy way to do this is to “practice” making your estimated monthly mortgage payment for a few months by putting anything above what you currently pay in rent away in savings.
Disclaimer: The above is provided for informational purposes only and should not be considered tax, savings, financial, or legal advice. Please consult your tax advisor. All calculations and information shown here are for illustrative purposes only. All third parties listed above are for demonstration purposes only and are not affiliated with LendingHome. All views and opinions expressed in this post belong to the individuals referenced. NMLS ID: 1125207 Terms, Privacy & Disclosures. Copyright LendingHome Corporation 2019.