Mortgage lenders typically look at debt-to-income ratio when trying to decide who is qualified for home loans. This calculation is generally used to determine whether an applicant has enough net cash flow, after taxes, each month to pay their debt obligations as well as the proposed mortgage.
Some lenders look at the monthly cash flow constraints of the proposed mortgage, while some lenders look at the actual level of the debt owed. There was no set guideline or rule, resulting in many potential buyers being rejected for their mortgage applications. Now, Fannie Mae has clarified that lenders should look at income-based repayment plans and utilize the monthly debt-to-income ratio in their qualification process.
What will this change for future buyers? Qualifying for a mortgage may become easier now that mortgage lenders will look at the income qualification rather than the total debt owed. However, potential buyers need to be cognizant that taking on more and more debt can leave them vulnerable financially, especially if their job situation changes. They will still need to have a good credit history, FICO score, and employment history.