Wednesday, May 21, 2008

More Changes with Fannie Mae

Fannie Mae will be releasing a new guidelines for their AUS over the Memorial Day weekend: Version 7.0. Loans submitted prior to Memorial Day with an approval via Fannie Mae’s Version 5.7 will be honored. Fannie Mae is saying that there will be more Expanded Approvals (higher rates) than what we have experienced. I’m not saying that’s good or bad…just that if you’re considering a mortgage, getting approved before the Memorial Day weekend could be to your advantage. Here are just some of the changes:

Loan to values greater than 85%. Private mortgage insurance is no longer considered a “mitigating” factor for higher loan to values. The more equity in the property, the more Fannie Mae smiles upon you (this is a not a change, the pmi factor is).

“Authorized Users” on credit cards will no longer be considered. It was not uncommon for parents to add their child to their credit accounts as an “authorized user”. This may have been done so that the child could have credit available in the event of an emergency (picture a college student away from home). Once people figured out that the timely payments made by the parent (or credit payer) was benefiting the “authorized user”, it didn’t take long for some people to actually sell their credit history on that account by allowing strangers to become “authorized users”.

Debt to income ratios tighter. “In general, the updates to the maximum allowable total expense ration in DU (Desktop Underwriter aka Fannie Mae) Version 7.0 will be more conservative…”

Loan Type/Level of Risk. With Version 7.0, Fannie Mae is associating levels of risk with varios products (from lowest to highest):

  • Fully amortized fixed rate mortgages
  • Fully amortized 5, 7 and 10 year ARMs
  • 6 month, 1 and 3 year ARMs and Fixed Rate Interest Only Mortgages
  • Interest Only ARMs and balloon mortgages

Version 5.7 viewed fully amortized fixed rate, fixed period (3-10 year) ARMs as having the least amount of risk with balloon and interest only mortgages having moderate additional risk. Negative amortized mortgages were considered the riskiest…now they’re off the charts.

Condos are now considered a higher risk than single family detached. Version 7.0 views one-unit properties that are not “attached condominiums” as less risk than attached condominiums and two-unit properties. Three- and four-unit properties have a higher level of risk associated than condo and duplex properties.

Bankruptcy, mortgage delinquencies and foreclosures. A bankruptcy needs to be fully discharged and 24 months since the date filed.
If a borrowers credit report shows a mortgage that was reported 60 or more days delinquent in the last 6 months, they will receive a “refer”.
If the borrower has had a foreclosure reported within the last 5 years, they will also receive a “refer”. If the date of the foreclosure cannot be determined, if the foreclosure was filed within the last five years and has not been satisfied, the loan will be declined.

Self-employed borrowers will no longer be considered “an additional layer of risk”! Hey…I have to end this on a positive note!

Expanded Approval is being pumped up. Fannie Mae is anticipating more EA approvals. An EA approval means that the borrower’s scenario is “less than perfect” or some prefer to say “A Minus”. There are different levels of EA approvals (such as EA-1, EA-2, etc.). Expanded approval also come with higher rates than a typical conventional mortgage as it’s risk based pricing.

Guidelines will continue to tighten for a while with Fannie/Freddie and the private mortgage companies. This is again, another reason for people, professionals and consumers alike, to learn all they can about FHA which may be an option to consider over an Expanded Approval and tougher underwriting standards with conventional mortgages.

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