So what does it take to get approved for a mortgage to buy a house this summer, whether you’re a first-timer, planning to move up or downsize? Maybe not all that you think.
For most people, the key requirement is that you’ve got the right package of stuff — acceptable credit score, down payment, financial reserves, debt-to-income ratio — to get an acceptable grade from the automated underwriting systems or “black boxes” installed at the dominant investors in the market, Fannie Mae and Freddie Mac.
Though the intricate webs of algorithms and big data spun inside Fannie’s and Freddie’s black boxes are kept under tight security, we do get monthly read-outs on some of the characteristics of loans they’re approving.
For example, in June the average FICO credit score for home purchase loans at Fannie and Freddie was 754. That’s a big reach for millions of would-be buyers. It’s well above the national average FICO score of 700 and considerably higher than what was typical during much of the previous two decades. (FICO scores range from 300 to 850, with higher scores indicating lower risk of default.)
Debt-to-income ratios are another major factor hard-wired into the black boxes — and can be deal-breakers in mortgage applications that otherwise look pretty good. DTI refers to the ratio of your monthly credit-related expenses — including current rent, mortgage payments, credit cards, student loans and the like — compared with your monthly gross income. If you have $6,000 in income and $2,500 in total debt payments, your DTI is 42 percent.
Fannie’s and Freddie’s average DTIs look strict, but there’s actually more wiggle room for mortgage applicants this summer than any time in recent years. The average DTI for Fannie and Freddie during June was 39 percent. FHA, which tends to be more forgiving on debt matters, had average DTIs in June of 43 percent. But Fannie, Freddie and FHA recognize that even solid, creditworthy applicants can be carrying high debt loads in the current economy, and they are open to higher DTIs than the monthly statistics suggest. In an important policy change taking effect this month, Fannie raised its permissible maximum DTI to 50 percent. A study released last week by the Urban Institute predicts that this change alone could open the mortgage door to 95,000 additional homebuyers. That’s potentially a big splash.
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