July could make things easier for prospective mortgage borrowers as CNBC.com mused. First is the three major credit bureaus’ removal of derogatory records from credit reports, and there is Fannie Mae lowering its debt-to-income ratio requirement. How will each update benefit consumers like you seeking mortgages this time?
Experian, Equifax and TransUnion and Higher Credit Scores
Beginning July 1st, the Big 3 credit bureaus will remove new or existing (i) state and federal tax liens and (ii) civil judgments from their databases and consumers’ credit reports.
For the credit bureau to expunge such public records, your civil judgment or tax lien should lack personal identifying information. Moreover, public records should be updated every 90 days to ensure accuracy.
The implication of a cleaner credit report? Your credit score could go up. As the credit bureaus said in their statement announcing this change back in March, the new reporting standards should result in modest score changes. For FICO scores, consumers could see an increase between 20 and 40 points on their credit scores.
A good credit score is important in getting a good mortgage rate and a good leverage point to negotiate the loan’s other terms.
Fannie Mae and the Lowered DTI Ratio
Before July ends, Fannie Mae will roll out its latest version of Desktop Underwriter®. One good news behind the latest DU® update is a higher maximum DTI or debt-to-income ratio allowed.
The DTI ratio measures your ability to pay your mortgage debt based on your debt load. It takes into account your gross monthly income vis-a-vis your recurring expenses on a monthly basis.
It’s one way for lenders to gauge how mortgage borrowers can comfortably take on their home loans given their existing expenses. They often ask for a lower DTI because it means a lower percentage of one’s income goes to one’s debts and that he/she is able to take on another loan like a mortgage.
But Fannie Mae’s DU® will now consider loan applications whose borrowers have a DTI ratio of 50%. If your DTI is above 45% but not greater than 50%, you will not be asked to provide additional compensating factors.
If, however, your DTI exceeds 50%, your loan casefile will get an “Ineligible” recommendation from the DU®.