With the lowest rates of home ownership in nearly 50 years, mortgage companies are looking for ways to increase applications. The first quarter of 2017 saw nearly flat ownership rates hovering at 63.7%, inching up from the all-time low of 62.9%.With consumers over 65 supporting an ownership rate of 78.6%, unsurprisingly, Senior’s own homes at a faster pace than Millennials, and only 34.3% of Millennials 35 and under obtaining the goal of home ownership.
Recent changes in 2nd quarter of 2017, designed to help first-time buyers qualify for homes, address a few of the key challenges keeping Millennials out of the housing market.
The Fannie Mae Factor
Fannie Maeis an organization created in 1938 by Congress that buys mortgages from lenders and repackages them into mortgage backed securities guaranteed by the US government. The organization frees up money for credit organizations to increase their financial capacity to support more borrowers.Subsequent mortgage backed securities provide safe reserves for insurance companies, pensions, and other guaranteed investments.
Banks must follow the strict rules presented by Fannie Mae to qualify to sell their mortgages to the company. After Fannie Mae’s near collapse in 2008, guidelines significantly tightened. During the recession, even highly qualified borrowers found it difficult to qualify for a loan, while banks and the secondary lending market worked to save current mortgages facing default.
Nearly a decade after the housing collapse, and near failure of Fannie Mae, the industry is set to adjust lending parameters, which will assist first-time buyers to purchase a home.
2017 Changes to Fannie Mae’s Lending Requirements
Removal of non-mortgage debt from the debt to income calculation. The debt to income ratio is one of the most important elements of a loan application. It places a limit on the individuals’ borrowing capacity based on income and current debt levels.To determine a borrower’s debt to income,banks calculate the debts which appear on the credit bureau report plus the new mortgage payment.. The new rules make it possible to remove a current debt payment of the debt to income calculation even if a third party pays the debt and the borrower can document those payments for 12 months or longer.
Employers offering student loan repayment benefits, military members relying on government repayment, and parents who cover a child’s car payment or student loan qualify. The only exception is sellers and real estate agents, who cannot cover those costs for the buyer. Eliminating a $300 or $400 payment of the debt to income can increase the borrower’s buying power by thousands of dollars: A quick estimate is that every $10,000 in price, raises the payment around $100. The result of lower debt payments by $500 could increase buying power by as much as $50,000, depending on the rate and term of the loan.
Changes to student loan payment calculation. Prior to 2017, students enrolled in income based repayment programs could not use the lower payment amount in the mortgage underwriting process because the payment changed each year. Fannie Mae required lenders to use a much higher payment of 1% of the outstanding balance for purposes of the debt to income ratio.. A student enrolled in an income based plan with a $50,000 loan, would have $500 a month counted against the debt payments, greatly impacting the ability to qualify for a higher loan limit.
As of April 2017, lenders may use the actual payment from income based repayment plans provided the credit bureau lists the monthly payment thatmust be greater than zero. Given that it can take a few months to update payments on a credit file, lenders recommend signing up for an income based program 90 days or more before applying for a mortgage.
Non-cash out refinance rates apply to student loan and equity refinances. As of April 2017, borrowers can convert higher interest student loan debt into a mortgage without the upcharge. Those with private student loans or PLUS loans could benefit. The change only applies to loans in the borrower’s name and must pay off at least one loan in full. Federal loans typically have low current rates, along with other benefits such as income based repayment plans and generous deferments, making them less of a candidate for a refinance. However, private and PLUS loans typically feature higher rates than a first mortgage could provide. With interest rates still lingering at or below 4%, it could be an opportunity to save thousands in interest over the life of the loan.
Increase in debt to income ratio maximums. As of July 29, 2017, Fannie Mae will increase the maximum debt to income ratio to 50%, from the previous 45%. While some lenders currently offer exceptions bringing the ratio above the 45% threshold, they must justify the exception to keep the loan within conforming guidelines. The CFPB (Consumer Financial Protection Bureau) recommends a borrower's debt to income remain below 43%, which could put more homeowners at risk of default under the new rules. However, with rising house prices and stagnant wages, the higher ratio will allow more borrowers to qualify for more expensive homes.
The combination of lowering student loan repayments, eliminating debt paid by a third party, and increasing the maximum debt to income, many first-time buyers will now qualify for home ownership. The changes do not address the tight housing market or change down payment requirements, which can also be a barrier to entry. However, adjustments to the debt to income ratio will open the door of home ownership to more buyers.