Debt to Income Changes for Kentucky USDA Loans
The Headline: Higher PITI Ratio Now Allowed
- More Buying Power: With a higher PITI ratio, you may be able to qualify for a larger loan amount. This could mean the difference between settling for a fixer-upper and landing your dream home.
- Easier Qualification: If you were previously on the edge of qualifying, this increase might just push you over the line into homeownership.
Understanding the Changes
Let's break down the key updates:
- Maximum PITI Ratio Increase:
- Old limit: 29%
- New limit: 34%
- Impact: You can now allocate up to 34% of your gross monthly income towards your mortgage payment, property taxes, and insurance.
- Clarification on Business Debts:
- The USDA has provided additional guidance on how business debts reported on your personal credit report are treated.
- This could be particularly beneficial for small business owners and self-employed individuals.
- Ratio Waivers for Purchases:
- Important note: Waivers are not permitted to increase the PITI ratio above 34% for purchase transactions.
- This ensures responsible lending practices while still providing flexibility.
- New Compensating Factors:
- The USDA has added more compensating factors that can support the approval of a ratio waiver.
- This means more opportunities for approval if you have strengths in other areas of your financial profile.
What This Means for Kentucky Homebuyers
These changes are a game-changer for many potential homeowners in rural Kentucky. Here's why:
- More Flexibility: The higher PITI ratio gives you more wiggle room in your budget when shopping for a home.
- Clearer Guidelines: With better clarification on business debts and compensating factors, you'll have a clearer picture of where you stand.
- Responsible Lending: The cap on ratio waivers for purchases ensures that the program remains sustainable and responsible.
How the New 34% PITI Ratio Benefits USDA Loan Applicants: A Practical Example
To understand the real-world impact of the increased PITI (Principal, Interest, Taxes, and Insurance) ratio for USDA loans, let's walk through a hypothetical example. We'll compare how a potential buyer would fare under the old 29% ratio versus the new 34% ratio.
Meet Our Hypothetical Buyer: The Johnson Family
- Annual Gross Income: $60,000
- Monthly Gross Income: $5,000
- Credit Score: 680
- Existing Monthly Debts: $500 (car loan and credit card payments)
Scenario 1: Old 29% PITI Ratio
Under the old rules, here's how the Johnsons' maximum mortgage payment would be calculated:
- Maximum PITI payment:
- 29% of $5,000 = $1,450 per month
- Maximum loan amount (assuming a 3.5% interest rate, 30-year term, and estimated taxes and insurance of $250/month):
- Maximum P&I payment: $1,450 - $250 = $1,200
- This translates to a maximum loan amount of approximately $268,000
Scenario 2: New 34% PITI Ratio
Now, let's see how the Johnsons fare under the new 34% PITI ratio:
- Maximum PITI payment:
- 34% of $5,000 = $1,700 per month
- Maximum loan amount (same assumptions as above):
- Maximum P&I payment: $1,700 - $250 = $1,450
- This translates to a maximum loan amount of approximately $324,000
The Benefit: Increased Buying Power
The difference is significant:
- Increase in maximum PITI payment: $250 per month
- Increase in maximum loan amount: $56,000
This means the Johnson family can now qualify for a home that's about $56,000 more expensive than they could under the old rules. In many rural areas of Kentucky, this could be the difference between a modest starter home and a more spacious family home, or a home with desirable features like an extra bedroom, a larger lot, or modern amenities.
Additional Considerations
- Debt-to-Income Ratio: Remember, USDA loans also consider the overall debt-to-income ratio. In this case:
- Old rule: ($1,450 + $500) / $5,000 = 39% DTI
- New rule: ($1,700 + $500) / $5,000 = 44% DTI Both are within USDA's typical maximum of 41-46% DTI.
- Affordability: While the Johnsons can qualify for a larger loan, they should carefully consider if the higher payment fits comfortably within their budget.
- Home Price Variations: In some rural areas of Kentucky, a $56,000 increase in buying power could significantly expand housing options.
Conclusion
The increase in the PITI ratio from 29% to 34% provides substantial benefits to USDA loan applicants like the Johnson family. It increases their buying power and expands their options in the rural housing market. However, it's crucial for buyers to consider their overall financial picture and ensure they're comfortable with the monthly payments before maxing out their borrowing capacity.
Next Steps: Is a USDA Rural Housing Loan Right for You?
If you've been on the fence about applying for a USDA Rural Housing Loan, now might be the perfect time to take action. Here's what you can do:
- Check if your desired area qualifies as "rural" under USDA guidelines.
- Review your current debt-to-income ratio and see how it fits with the new 34% PITI limit.
- Gather documentation on your income, including any business debts if you're self-employed.
- Speak with a USDA-approved lender to get a more detailed assessment of your eligibility.
Remember, while these changes make it easier to qualify, it's still important to borrow responsibly and ensure that your mortgage payments are comfortably within your budget.
Conclusion
The Kentucky USDA Rural Housing Loan program's new guidelines offer a fantastic opportunity for many Kentucky residents to achieve their dream of homeownership. With higher ratios allowed and clearer guidelines, the path to your rural Kentucky home just got a little smoother. Don't wait – start exploring your options today!
Joel Lobb Mortgage Loan Officer
American Mortgage Solutions, Inc.
10602 Timberwood Circle
Louisville, KY 40223
Company NMLS ID #1364
Text/call: 502-905-3708
email: kentuckyloan@gmail.com
http://www.mylouisvillekentuckymortgage.com/
NMLS ID# 57916, (www.nmlsconsumeraccess.org).