It's the No. 1 reason why mortgage applicants nationwide get rejected: They're carrying too much debt relative to their monthly income. It's especially a deal-killer for millennials who have to stretch every month to pay the rent and bills.
But here's some good news: The country's largest source of mortgage money plans to ease its debt-to-income requirement, potentially opening the door to mortgages for large numbers of new buyers.
On July 29, Fannie Mae will raise its DTI ceiling from the current 45 percent to 50 percent.
The ratio compares your gross monthly income with your monthly payment on all debt accounts — credit cards, auto loans, student loans, etc., plus the projected payments on the new mortgage you are seeking. If you've got $7,000 in household monthly income and $3,000 in debt payments, your DTI is 43 percent. If you've got the same income but $4,000 in debt payments, your DTI is 57 percent.
Studies by the Federal Reserve and FICO, the credit scoring company, have documented that high DTIs doom more mortgage applications than any other factor. They're viewed critically by lenders, and for good reason: If you are loaded down with monthly debt, you're at a higher risk of falling behind on mortgage payments.
But in a large study, Fannie's researchers found that a significant number of borrowers with DTIs in the 45 to 50 percent range actually are not prone to default. They have good credit, can make significant down payments and have saved a year's worth of financial reserves.
"We feel very comfortable" with the increased DTI ceiling, said Steve Holden, Fannie's vice president of single-family analytics. "What we're seeing is that a lot of borrowers have these other factors."
Lenders welcome the change. "It's a big deal," said Joe Petrowsky of Right Trac Financial Group near Hartford, Connecticut. "There are so many clients that end up above the 45 percent debt ratio threshold" and get rejected.
Now they've got a shot.
Kenneth R. Harney covers housing issues on Capitol Hill for the Washington Post Writers Group.