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Big paycheck but lots of debt? Fannie Mae has a solution

Some consumers have high incomes but hefty amounts of debt. Fannie Mae helps some by increasing the debt-to-income limit, the most common hurdle for would-be homeowners.

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By Ron Trujillo/ron@calhomenews.com

Fannie Mae will increase the debt-to-income ratio in late July, allowing more consumers, especially those with high income but little savings, to become homeowners.

A high debt-to-income ratio is the primary reason why most applicants are denied a mortgage.

Fannie Mae, the largest source of mortgage money, will boost the debt-to-income ratio from 45% to 50% on July 29, according to a news release. The debt-to-income ratio includes a borrower’s total amount of debt – credit cards, auto loans, student loans and mortgage – versus their total income.

For example, consumers who earn $100,000 per year could not exceed $50,000 in debt payments under the higher DTI limit. It’s just one more reason why consumers should curb their debt before applying for a mortgage.

“Given the current historically low mortgage default rates from over-cautious lending standards, there is clear room to expand credit availability,” says Lawrence Yun, chief economist for the National Association of Realtors.

Yun talked about the increase in DTI during the National Association of Realtors Sustainable Homeownership Conference in early June at the University of California, Berkeley.

Fannie Mae and Yun say concerns about a higher DTI could lead to the same bubble conditions that prompted the 2008 housing crisis are unwarranted. Consumers have substantially higher credit scores than a decade ago and lenders have much-stricter lending requirements.

However, there is still a bit of a roadblock on the road to homeownership for those with high debt-to-income ratios: Qualified mortgages need a ratio of 43%. But that could change in the coming months.

Illustration by Hvostik/Shutterstock.

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The average California homeowner enjoyed a $26,000 boost in equity during the first quarter compared to a year ago, the second-highest increase in the nation.

It’s the second-consecutive quarter of a $26,000 gain, allowing more homeowners to become equity rich or escape underwater mortgages, according to a CoreLogic report.

Only Washington state had a larger increase at $38,000 during the first quarter. And California’s equity gain was almost double the national increase of $14,000.

Virtually all homeowners in the Bay Area have equity at 99.4%, the highest percentage in the nation. Los Angeles-Long Beach had the fourth-highest equity rate at 97.3%, up one spot from the first quarter.

Statewide, 95.8% of homeowners with a mortgage enjoy equity, with only 4.2% of homeowners – primarily in the Central Valley and Northern California – enduring underwater mortgages.

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