There doesn’t seem to be a week that goes by when we don’t hear of a new guideline coming down the line. Sometimes, it only affects how we deliver our loans to the investors and others, it does affect borrowers.
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.
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