Fannie Mae is raising the Debt-to-Income Ratio: What you need to consider

Recently Fannie Mae, the organization that often times buys the loans from the lenders where you get your loan initially, announced that they are raising the debt-to-income ratio from 43% to 50%.  What does this mean?  It means buyers will soon qualify for a higher loan amount (assuming interest rates stay the same), because more of their income can account for debt.  For example, if you make $5,000/month, before you qualified for up to 2,150/month all in.  Now you can qualify to spend up to $2,500/month towards debt.  This can be a good thing for those Buyers needing to qualify for a higher amount, especially considering the rising prices here in Los Angeles.

Now, I’m not a financial adviser or a Certified Public Accountant, and you might want to speak with these individuals, but there are a few things you need to consider before maxing out your loan amount:

1. Based on pre-tax dollars: Using the $5,000/month as an example, keep in mind you qualify for $2,500/month towards debt, but you are not taking home the entire amount. There are tax withholdings.  So depending on your situation, including write offs, you could be spending more than a single paycheck towards the roof over your head.
2. They only look at your documented debt, not your overall expenses: Expenses include health insurance, car insurance, gas, groceries, utilities, cell phone, etc.  You need to lay out all of your expenses so that you have a clear understanding of what you can afford, not just what you are pre-approved for.
3. There are pros to raising the limit: Rents are often higher than homeownership costs.  This means that you may be spending half of your income on the mortgage, but it may be less than what you are paying in rent.  And with a fixed interest rate mortgage, while rents increase year over year, you stay the same.   Also, if you have a stable job with continuous income raises, it may be worth maxing it out so that you can lock in the interest rate and the prices, and over time it will be easier to financially manage.
4. This may affect home values: With more debt that can be obtain, it means home buyers have more leverage, and thus can offer more.  It can raise prices.  So if you are on the fence about buying, you may want to buy now.

As you can see, this can be a good thing for home buyers, but you have to take all things into consideration.  Speak with the right financial professionals and get all of your ducks in a row before making the move.