Tighter underwriting guidelines effective today
Mortgage Industry bellwether Fannie Mae announced this morning that it has successfully implemented the latest version of it’s automated underwriting engine known as “Desktop Underwriter”. Fannie Mae is the largest purchaser and “securitizer” of mortgages in the United States. The new guidelines featured in this version of the software will make it more difficult for many loan applicants to qualify for mortgage financing. The changes will impact mortgage applications starting today.
Here are the highlights:
* Update to Credit Risk Assessment: Fannie Mae has made adjustments to it’s credit assessment with the intent of managing, “default risk in this market and to provide reasonable, prudent, and sustainable homeownership options to borrowers.” In other words, Fannie Mae is raising the bar on borrowers with marginal credit histories. These applicant’s are going to have a tougher time getting approved for financing.
* Reduction in maximum debt-to-income ratios (DTI): DTI ratios measure a loan applicant’s proposed housing payment plus all other monthly debt obligations divided by their monthly gross income. Up until today loans with DTI’s as high as 56.9% were regularly approved. As of today most applicant’s will only get approved if their DTI is 45% or less. With compensating factors (i.e. large down payment, stellar credit, lot’s of reserves) an applicant may go as high as 50%.
On the surface this update seems completely reasonable. However, keep in mind that most households have cash-flow coming in that cannot be included as income on their loan application. Therefore, an applicant’s qualifying income, which is the denominator in the DTI equation, is often a very conservative interpretation of their actual monthly cash-flow. This will have an especially large impact on self-employed persons (sorry realtors).
* Tighter guidelines for applicants with foreclosures & BK’s: For applicants with foreclosures on their credit report they will not be eligible for Fannie Mae financing for the first 5 years from completion date (they may be elgible for FHA financing sooner). After 5 years they need to have a minimum of 10% down payment, a credit score of 680 or higher, and will not be permitted to do a cash-out refinance. Keep in mind that in most cases the foreclosure falls off the applicant’s credit report after 7 years.
Applicant’s with a Chapter 13 BK on their credit report that was discharged within in the past 24 months, dismissed within the previous 48 months or a non-Chapter 13 BK (i.e. Chapter 7) that was filed, discharged, or dismissed within the previous 48 months will not be approved for a new mortgage. The previous guidelines had timelines fo 24-36 months.
*Duplex maximum loan-to values (LTV’s) decreased: Under previous guidelines many loan applicant’s could get up to 95% financing for owner-occupied duplexes. When the mortgage was to be used for investment property purchase of a duplex the maximum LTV was 85%.
Under the update the maximum LTV is 80% for owner-occupied purchases and 75% for investment property purchases. Interest-only loans are no longer available for investment property.