Earlier this year, the Federal National Mortgage Association (aka Fannie Mae) released an updated version of its Selling Guide (SEL 2017-06) that mortgage loan underwriters use to determine loan approvals. There were numerous changes reported, including raising the maximum debt-to-income ratio (DTI) from 45% to 50%. You can read about some of the other most notable changes here.
Alimony Policy Change
However, the Fannie Mae Selling Guide change that really caught my eye was in relation to alimony guidelines. I was surprised that the new policy actually kind of flew under the radar when it was first announced, but it has already proven to be an important update in the few months since. I believe it will end up saving many loans. It will definitely help some divorced people to qualify for a mortgage when they might not have in the past.
The update from Fannie Mae basically states that lenders are allowed to deduct alimony from the income before calculating the DTI. In the past, it was considered a debt, which would obviously hinder the debt-to-income ratio for the affected applicant.
Why does this change matter? It’s simple, having a lower DTI will impact your eligibility for a mortgage loan. Any debt you can remove will improve your chances of getting a mortgage loan at desirable terms, whether it’s a credit card balance, car loan or student loan. Removing alimony from the equation will help your cause if it is one of your financial liabilities.
Let’s look at two examples, before and after this policy update:
Your gross income is $5,000 a month. Your proposed mortgage has a monthly PITI (principal + interest + taxes + insurance) of $1,000. You have other debts that add up to another $1000, along with an alimony payment of $500 a month.
In this older example, your total monthly debt would be $2,500. When compared against your income, it would equal a 50% DTI. You may still qualify for a loan, but you’d really be on the fence.
Your gross income is $5,000 a month. Your PITI and other debts are the same at $1,000 each. And, you still have the $500 a month alimony payment.
Under the new Fannie Mae guideline, your alimony payment would be deducted from your gross income BEFORE the DTI is calculated. Your gross income would be adjusted to $4,500 ($5,000 minus the $500 alimony) and your total debt would now be $2,000. It might seem like there’s no big difference in the grand scheme of things since all the amounts are the same. However, your new DTI would be 44.4% and would look more attractive to a mortgage loan underwriter.
By shifting alimony away from the debt category, it really does make a significant difference in the final DTI calculations. It could be the difference between you qualifying for a mortgage loan or not.
If alimony is a concern of yours as you prepare to apply for a home loan, it’s important to understand the regulations and know all your options. Give us a call a Transparent Mortgage and we’ll help you get the mortgage you desire while making the right decisions for your financial future. Call me today at (619) 929-0199.