The primary lender packages up and sells these mortgages on the secondary market as mortgage backed securities to free up funds and be able to lend more money.
One of the largest players in the secondary market is the government and they set their criteria on what type of mortgages they will buy. Currently, consumers can qualify for mortgages with DTI (Debt to Income) ratios all the way up to 49% and the government will still buy them on the secondary market. However, the government has begun to hint that they want to take a more conservative position and bring their DTI limits to 43%
So how does this effect both buyers and sellers?
For buyers: You will now have less purchasing power as you will qualify for a smaller mortgage amount. For example, say you gross $10,000 a month. Currently you can have a monthly debt of $4,900 at that income level.
Hypothetically, Let's say in that $4,900 monthly debt, $2,800 goes towards your mortgage, $1,500 goes towards your credit card expenses and the remaining $600 goes towards car loans. Now keeping your wage at $10,000 and lowering the DTI to 43% you can now only have monthly debt of $4,300. If your credit card and car loan expense stays the same, you've now gone from being able to afford a $2,800 monthly mortgage payment to a $2,200 monthly mortgage payment.
For Sellers: Being that buyers will have less purchasing power, the market will not appreciate as much as it has for the past two years (7%-10% YTD). Simply, what this means is that if you're planning on waiting to sell for another few years to see your home appreciate, don't. Interest rates are only going up from here so it makes more sense to sell now when buyers can still afford more than usual due to lower interest rates. While you can take advantage of the low rates yourself on your next purchase.
As always if you have any questions, give me a call 201-403-1314.
-Kyle Kovats, New Jersey Realtor
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