The housing market crash forced lenders everywhere to tighten up their standards. That resulted in a number of consumers, particularly young people, to become ineligible for a mortgage. Realizing that millennials are the key to growth in the housing market, many lenders such as Fannie Mae are now loosening up their standards a bit. Here is an overview of some upcoming changes, as well as their anticipated effects.
Debt-to-Income Ratio Changes
The homeownership rate for those under 35 is at its lowest level in decades. One reason is that millennials in particular are often plagued with student loan debt that can prevent them from becoming qualified for a mortgage. This is one reason Fannie Mae plans to increase the Debt-To-Income (DTI) ratio from 45% to 50%. A person’s DTI ratio is his or her debt payments divided by monthly income, and includes all types of debt including student loans.
The new change by Fannie Mae might in fact be policy that is finally catching up to practice. According to the American Enterprise Institute, a good number of lenders have recently increased the number of approvals for those with DTIs higher than 43%. That is the amount recommended by the Consumer Financial Protection Bureau in order to safeguard a loan. More than half of all FHA loans are now being approved for applicants with DTIs of 43% or higher, as are approximately 43% of all VA loans.
Home Prices Rising Faster
Increasing the DTI percentage will also help those in markets where housing prices have risen faster than income. Some economists believe millennials are also affected by a sudden surge in housing prices, as the second-biggest issue they face involves coming up with enough money for a down payment. This doesn’t tend to be as much an issue with older buyers, who have had more time to save and might even have equity built up in an existing home.
Not Likely to Have Detrimental Effects
The very thought of lenders loosening their standards has many people fearing another housing bubble. According to Mark Fleming, a chief economist for First American Title Insurance Company, there is little reason to worry. He claims that one’s DTI ratio is only part of the picture, as credit score, steady income, and a strong history of paying debt is also required.
Fleming adds that prior to the crash, lenders were more interested in approving loans than they were verifying an applicant’s ability to pay. In fact, Fleming notes that many did not check income or credit history at all. These days, mortgage brokers are more likely to scrutinize every detail, leaving fewer people to fall through the cracks.
Millennials Now Have Options
Lenders are realizing that they must cater to the needs of millennials if they are to maintain a healthy housing market. Small changes such as those planned by Fannie Mae are one way to ensure that more young people with a stable credit history are able to afford the American dream of becoming a home owner.