Mortgage Loan Standards Are Tightening
All lenders, including and perhaps most specifically Fannie Mae and Freddie Mac, are writing off billions of dollars of uncollectable debt as they acquire homes through foreclosure. By tightening the standards, they hope to contain the damage to what is already on their plate. I don't blame them. At this point, we have a mess that is larger than anyone could have imagined a few years ago. It isn't over, and no one wants to add more loans that are likely to go bad in the future.
Remember that in this environment, there has been a lot of tightening already. For example, you cannot borrow without documenting sufficient income; you need to have reasonable credit scores; and you need to have a down payment if purchasing, and equity if refinancing. Here are some samples of current tightening:
Fannie Mae announced that they will not approve borrowers with total debt-to-income ratios greater than 45 percent. For example, if your income was $5,000 per month, your maximum outgo would have to be less than 45 percent, or $2,250 per month. If you had a $300 car payment and other bills with payments of $100, you would subtract $400 from $2,250, leaving $1,850 for a housing payment. Subtract anticipated monthly taxes and insurance to get the maximum allowable mortgage payment.
This is a dramatic change, as they would have approved loans with much higher ratios not too long ago. Note that Freddie Mac has not instituted this restriction. At least not yet, so if your ratios are pushing this limit, you would want to work with a lender that uses Freddie Mac.
Fannie Mae will also no longer do any loan where a borrower's FICO score is less than 620. They were doing these before, but they were exacting revenge by pricing hits that were almost confiscatory. Freddie Mac, again, has not done this yet.
I expected that real estate investors would take advantage of the drop in value to load up on properties, and that seems to be happening. I believe a good strategy is for an investor to buy now and hold for the long term value and cash flow. Fannie and Freddie will still allow up to ten properties to be financed, but the minimum FICO score is now 720 and loan-to-value is lowered. Purchases and rate-and-term refinances are allowed, but cash-out refinances are not.
Finally, on the Super Jumbo Conforming loans available in higher-cost areas, getting a new loan that is larger than the current loan, even if paying off a second TD loan, is considered a cash-out refinance. The minimum FICO score is 740 and the maximum allowable loan-to-value is 60 percent, and there is a 1-point added hit to the upfront fees.
The upshot of this is that if you want a mortgage, you will need to do everything you can to improve the measures of your creditworthiness. As a responsible adult, you would want to do this anyway, but a stricter disciplinarian is now in the room to assure compliance.
Randy Johnson – Author of How to Save Thousands of Dollars on your Home Mortgage and Savvy Borrower
articles, Randy is a mortgage broker who has financed over $1 billion
in properties. He writes about home buying and real estate finance
topics for CreditBloggers.com.
Very interesting change of events for buyers like myself. I appreciate the specifics around Freddie and Fannie and am going to keep an eye out for implementation dates.
Posted by: Ryan | January 20, 2010 at 09:13 PM