Fannie Mae Giveth and Fannie Mae Taketh Away…
June 3rd, 2008 Josh Lewis, CMPThe beginning of June brings big news, both good and bad, from Fannie Mae, the government sponsored enterprise that is just about the only source of mortgage money in the secondary markets today (along with Freddie Mac which maintains very similar guidelines).
Let’s start with the GOOD:
As of today Fannie Mae has done away with the 5% declining market loan to value reduction. The declining market deduction effectively eliminated 100% financing in markets suffering from price declines and reduced maximum loan to value ratios across the board. Many homeowners found themselves unable to get financing due to the triple whammy of lower home values, tighter lender guidelines and the additional 5% declining market factor.
We can debate the soundness of this decision but it is definitely a positive for anyone looking to finance a home in a declining market. In effect, the 5% reduction was accounting for the likelihood of lower values tomorrow and making sure that lenders were making sound decisions regarding the collateral for their loans. The downside was that the reduction made money harder to get for both purchases and refinances and put further downward pressure on home values. An ugly Catch 22 with no easy solution but Fannie has decided to err on the side of homeowners and eliminate the declining market deduction.
You’re probably expecting bad news now that we are done with the good, but this news item contains some rays of sunshine mixed in with a heavy dose of clouds. As of June 1, Fannie Mae has implemented Desktop Underwriter 7.0, the newest version of its automated underwriting software (AUS). With version 7.0 the algorithms that determine whether or not your mortgage will be approved or not, and at what terms, has undergone significant revisions.
First, the good:
- Self-employment will no longer be considered a risk factor.
- Purchases will be considered a lower risk.
And, the not so good.
- Refinances with cash-out are now considered much a significant risk
- Interest only home loans are now considered a significant risk
- Maximum qualifying ratios have been reduced meaning more verifiable income will be required.
- Condos are now considered a significant risk factor
- Mortgage insurance is no longer considered a risk mitigating factor
- Authorized User accounts will be excluded in DU’s credit risk assessment meaning you won’t be given credit for being an authorized user on someone else’s accounts in good standing.
- 580 is the minimum credit score for all loans
- Borrowers with a mortgage delinquency of 60 days or more in the last 12 months will be ineligible, even if the mortgage is current at the time of submission.
- ARMs with negative amortization and terms longer than 40 years will be Out of Scope.
The bottom line is that guidelines continue to tighten and borrowers need to be able to verify their incomes and maximize their credit scores. Our “5 Steps to Mortgage Freedom” process will help you accomplish both.