What does this mean to you, the consumer?

When you apply for a home loan, the investor requires a tri-merge credit report with your mid-score being, at present, at 640 or above. The higher your credit score, the better your interest rate will be along with loan to value, cash-out or not, and purchase or refinance.

Normally once your credit report is pulled another one isn’t usually pulled, until now.

We are reverting back to the 90′s when a second credit report is pulled just prior to closing. So in other words after you have signed your loan documents and right before funding the loan, the investors are starting to require that a second report is pulled.

What are they looking for?

Mainly to see if your credit has stayed the same and to make sure you haven’t added more debt to your bottom line.

Best advice is during the mortgage loan process, keep everything to a minimum. It is exciting to purchase a new home and want to run out to purchase new furnishing whether it be new appliances, new furniture, or new window coverings. But please be warned that if you add debt to your bottom line, that home that you have started to furnish may not be yours.

So, please wait until after you get the call that your mortgage home loan has recorded.

     Though this is only a Fannie Mae guideline change, the lines tend to blur between Fannie and Freddie Mac as most lenders sell their loans to both.  I suspect that most lenders will adhere to this guideline for all of their conforming and jumbo conforming loans even for FHA.

     So what does this 45% debt to income ratio mean and how is it calculated? Very simply it means that your total debt–credit cards, installment payments, even student loans that are in deferred mode, and your mortgage payment–can’t be above 45% of your total monthly gross income.

     To calculate your debt to income, add up all of your minimum payments then divide by your total monthly income. Here’s an example:

Total monthly gross income:                                                                                $5000.00

Total monthly debt without mortgage payment:                                         $1500.00

Plus mortgage payment (principle, interest, taxes and insurance):   $2250.00

Total monthly debt:                                                                                                  $3750.00

 Divide $3750.00/$5000.00 =                                                                                   45.00%

     To make this calculation easier, you use this calculator to find out what you can qualify for. Or if you would like, please call or email me and I’ll be happy to assist you.

    And as always, I report daily on twitter  @mmtgsolutions on the mortgage interest rates and what to expect for the day. If one of these reports moves the market in a significant manner, I’ll write about it here.

     Please remember, I welcome your comments to this and my other posts. Have an inspired week.

     Betsy Moore

     www.mooremortgagesolutions.com

     206-331-2749

      Remember, these guideline changes will only affect loans sold to Fannie Mae, not Freddie Mac or to HUD though  Freddie Mac will most likely follow suit. HUD who insures FHA loans will most likely be having changes similar to this in the very near future.

      Fannie Mae sets the minimum standard on lending for mortgages that they will purchase from investors. In turn, the investors than overlays their guidelines, usually with higher standards. The reason the investors do this is they don’t want to be purchasing loans back if the borrower was to default within a certain time period after they are sold to Fannie. Other reasons would be the investors plan to  hold these loans in their portfolios for a time before selling them to Fannie.

     These two guideline changes will affect the borrowers and in the very near future or sooner, if investors decided in incorporate these changes into their own guidelines before December 12, 2009.

      So how will these Fannie Mae guidelines affect you?

     The minimum credit score will go back up to 620. What that means to a homebuyer is the lowest mid-score of all borrowers on the loan can’t be lower than 620 even if the primary earner’s mid-score is higher.

     An example would be if the husband, primary earner, has scores of 630, 660, 650 and the wife has scores of 615, 625, 650, than their mid-score would be 625. This score will than also dictate what their interest rate will be. The better the mid-score, the better the mortgage interest rate.

     The back-end ratio will be lowered from 50% to 45%. Your back-end ratio also known as the DTI (debt to income) ratio is  your total monthly mortgage payment, all the minimum payments on your revolving debt, all payments on installment loans, all student loans regardless whether they’re deferred are or not, and any payments on collections within reason divided by your total monthly income. This does not include your utilities or car and life insurance payments.

     On a monthly gross income of $6,000 that could mean looking at homes that are about $50,000 less than you could have afforded prior to this guideline taking effect depending on your other debts.

     These guidelines hark back to the 90s when we went though the last bad recession and the Savings and Loan bailout,. As the credit markets start functioning better and buyers of mortgage-backed securities are feeling more secured, then guidelines will slowly ease back to a more normal situation.

     Lenders/banks have already become more cautious on approving mortgages. These new changes will affect whether you can qualify for a loan when you re-locate for your career, more documentation will be required, and the value of your assets will be less. Even though these changes go into effect September 1, 2009, look for lenders/banks to start tightening up on these changes already and even adding their own more restrictive guidelines over these.

     Let’s  take them one by one:

1.  Trailing secondary wage earner income: The trailing secondary wage earner is a person who follows their spouse when that spouse is relocated in a different city. The trailing secondary wage earner’s income could be counted towards qualifying for their new mortgage even though they don’t have a job in the new city. It was assumed that that trailing secondary wage earner would obtain a job as soon as they were settled in. This will no longer be allowed causing most relocating couples to re-think about moving for career advancement in their company or new company, they may have to rent until the trailing wage earner finds a job in the new city, or be approved on one income for their new home mortgage loan.
2. Age of credit documentation: This will change from 120 days to 90 days for existing construction and 180 to 120 days for new constructions. This shouldn’t affect the borrower too much as most  most lenders/banks are already asking for updated documentation prior to going into final loan approval.  If your lender/banker hasn’t been, be prepared to provide this to them not only in the beginning of your loan process but also towards the end if from start to finish, the process is going to be greater than 90 days.
3. Verification of stocks, bonds, mutual funds and retirement accounts: This change will affect your reserves. Lenders/banks normally look at stocks, bonds, and mutual funds at 100% face value. Now, your assets will be at 70% and your retirement accounts will go from 70% to 60%. And your stock options will no longer be considered. What this means for the average borrower is most lenders/banks like to see at least six months of reserves in your bank accounts causing your reserves to be lower than the “like to see” and sometimes “required” amount. This doesn’t necessarily mean your loan won’t be approved but it could mean that your mortgage interest rate may be higher.  

     Remember, lenders/banks are in the business of making mortgage loans. Lending on mortgage loans is how these insitutions make money. Selling them to Fannie Mae and Freddie Mac is how they can do more mortgages.  But if your mortgage can’t be sold into Fannie Mae or Freddie Mac because the loan package wasn’t documented according to Fannie or Freddie guidelines then that mortgage is left on the insitutions’ books. To insure the mortgage can be sold to Fannie Mae or Freddie Mac, lenders/banks normally have their own “stricter” guidelines overlay on top of Fannie and Freddie’s guidelines.

      As always, feel free to contact me with your questions or concerns.