Scott Storace - Branch Manager, 100 Pacifica Drive Ste. 140, Irvine CA 92618 NMLS #226339 949.973.0141

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Boost Debt-to-Income Ratios with FNMA

Need to boost your buying power?  These days, I think we all could use a little help!  Fortunately, Fannie Mae recently revised it’s guidelines to help buyers boost debt-to-income ratios and increase buying power.  Effective immediately, it is now acceptable to pay off a revolving credit line at or prior to closing without also having to close the account.  That’s right!  The account can remain open and no monthly payment needs to be included in the DTI ratio!

Where the cost of living is high and the income flat, buyers may appreciate a little help to boost debt-to-income ratios!

Where the cost of living is high and the income flat, buyers may appreciate a little help to boost debt-to-income ratios!

What are debt-to-income ratios?

A debt-to-income ratio is one way lenders measure a buyers ability to repay a mortgage obligation in addition to any other outstanding debts.  To calculate your debt-to-income ratio, you add up all your monthly debt payments and divide them by your gross monthly income. Your gross monthly income is generally the amount of money you have earned before your taxes and other deductions are taken out. For example, if you pay $1500 a month for your mortgage and another $100 a month for an auto loan and $400 a month for the rest of your debts, your monthly debt payments are $2000. ($1500 + $100 + $400 = $2,000.) If your gross monthly income is $6000, then your debt-to-income ratio is 33 percent. ($2000 is 33% of $6000.)

Why would a buyer need to boost debt-to-income ratios?

There are several reasons.  For one, buyers with tight debt-to-income ratios may be pushing the max ratios allotted in order to secure financing for a home.  Buyers with the means to pay down or pay off credit lines in order to boost debt-to-income ratios are generally encouraged to do so.  Otherwise, if their debt-to-income ratios exceed the maximum threshold, they may not be able to secure a home loan.

Before FNMA Changed It’s Guides

Historically, buyers with tight debt-to-income ratios would have been asked to pay off AND CLOSE a revolving account in order to qualify for a loan.  However, buyers who had the means of paying off debt to boost debt-to-income ratios and qualify for a home loan, were sometimes unwilling since closing accounts could harm credit scores.  Those who did pay off and close revolving credit lines to qualify for a home loan were often subjected to costly delays.  Credit supplements stalled the loan process because they had to be ordered with letters from the creditors to confirm that the account were paid off and closed.

Additional benefits to this revision of guidelines may include:

  • Improved credit scores
  • Increased loan amounts
  • Better pricing and access to more loan programs
  • Reduced documentation and timelines

For more information regarding FNMA’s recent selling guide update, please contact me!

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