Fannie Mae has recently rolled out additional changes to their underwriting guidelines, changes that will have an immediate impact for some, and longer term consequences for others.
As the major funding resource for the mortgage industry, the Federal National Mortgage Association (Fannie Mae) walks a fine line these days. They must make prudent decisions to eliminate high-risk practices.
At the same time, excessive restriction could paralyze an industry that is already week in the knees. The following changes will be effective with loan applications dated Aug. 1, 2008.
For homeowners who are looking to acquire a new primary residence, Fannie Mae is raising the bar. If the current home is to be converted to rental property, Fannie Mae will now require the loan applicant to show at least 30 percent equity in that property through a current estimate of value.
The prospective buyer must also provide a fully executed lease agreement and proof that the security deposit for that lease has been deposited in the applicant’s bank account. If the applicant’s current financing exceeds 70 percent of the value of their current home, they will be qualified for the purchase of their new home with both mortgage payments counted as on-going debts.
Further, the customer must have six months of house payments, for both houses, in reserve at the time the transaction closes. With the recent declines in home values, these criteria will make it very difficult for many homeowners to fulfill their dreams of “moving up” in the housing market.
I’m guessing that the Federal National Mortgage Association has experienced significant loses from borrowers who built a portfolio of real estate using owner-occupied mortgages earlier in this decade.
If you know someone who has lost a home to foreclosure, they must now wait five years from the completion of the foreclosure sale before they will be eligible for a new mortgage with Fannie Mae.
Previously, the rule had been four years. Additionally, the next home purchase will require at least a 10 percent down payment and a minimum credit score of 680.
Loans will not be offered to these borrowers for the purchase of a second home or investment property, and cash-out refinances will also be prohibited up to seven years from the date of the foreclosure.
If a borrower has surrendered the deed to the property, in lieu of foreclosure, the “black out” period is four years. That is the current policy with Fannie Mae, but purchases with low down payments and refinances will both come under tighter scrutiny for up to seven years from the surrender date.
For those who are facing a short sale of their home, the impact of these guidelines is a bit fuzzy. The credit report record of that event may appear as “settled for less than the amount” owed, or other language to that effect.
As of this writing, my research with the credit bureaus indicates that the impact of a short sale on a customer’s credit score will be equivalent to a foreclosure.
David Ryland is a licensed real estate broker with 29 years of experience as a lender in Placer County. He is the acknowledged Dean of Loan Originators at Big Valley Mortgage in Roseville.