Further credit tightening coming in 5 weeks

Although the housing market seems to be stabilizing according to most measures (one could fairly argue that this is a near-term phenomenon subject to government stimulus) lenders continue to tighten underwriting guidelines making it harder for homebuyers to qualify for financing.

Yesterday I blogged about tighter guidelines for FHA refinances and today I am reporting tighter guidelines for conventional mortgages.  I came across this news in the Pipeline Press blog which is a great resource for mortgage industry related news.

It states that beginning in 5 weeks Fannie Mae will issue a new version of their automated underwriting engine.  In the new version borrowers will not be able to obtain an approval with debt-to-income ratios > 45% unless they have sufficient compensating factors (i.e. large down payment, lots of money in the bank, high credit scores, etc.).  Currently we are able to obtain approvals on loans with DTI’s in excess of 55%.

This may seem like a prudent requirement, after all, homebuyers shouldn’t be buying a home which carries a monthly payment in excess of 50% of their monthly gross income.  However, keep in mind that often times homebuyer’s qualifying income is much less than their actual income/ cash flow.  This is because underwriter’s take a “worst-case” approach to averaging annual bonuses, commissions, self-employment income, etc.  In my mind this requirement will negatively effect qualified buyers.

Furthermore, applicants will need a credit score of at least 620 in order to obtain an approval even if they have favorable compensating factors.