Fannie Mae is putting the squeeze on underwriting guidelines this fall, making it tougher for some condo, borderline and refinancing borrowers to land a home loan.
Effective Oct. 20, 2012, the stricter rules are designed to reduce Fannie Mae’s ever growing exposure to risk. They will also force more borrowers to shop around.
Here are some highlights:
• Condominium Loan Documentation – Right now with less than 10 percent down, condo buyers need to complete a two-page condo questionnaire about the homeowner association’s financials and provide additional documents including a reserve study, by-laws and a copy of the master insurance policy.
With the change, any application for a condo mortgage with less than 20 percent down must include the questionnaire and additional documents.
The documents are readily available from the homeowners association, but with Fannie Mae lenders pouring over more documents, there’s a greater chance more loans could be denied for failing to meet Fannie Mae’s condo loan underwriting criteria.
• End of Discretionary Approvals – Discretionary approvals, also called “Expanded Approvals (EAs)” will end for all Fannie Mae refinances, except Fannie Mae’s Refi Plus Program loans, also called HARP (Home Affordable Refinance Program) loans.
EAs gave some relief to borrowers with a less than perfect mix of loan-to-value (LTV) and debt-to-income (DTI) ratios, creditworthiness and financial reserves. EAs allowed underwriters some discretion in approving or denying loans for borderline borrowers.
The change means some borderline borrowers, who may have landed a loan through an EA, may not qualify for Fannie Mae loans.
• Self-Employed Borrowers – Fannie Mae will require self-employed borrowers seek a loan to provide two consecutive years of federal tax returns, instead of the current one year tax return requirement for some returns.
Self-employed businesses will still have to prove they’ve been in the same line of business for two years, but underwriters will base income on an average drawn from two years of tax returns.
Because of the new two-year average approach, one bad year out of two could sink a self-employed homeowner’s application even if the most recent year would have qualified him or her under the old rules.
• Maximum LTV Reduction for Adjustable Rate Mortgages (ARM) – The current LTV allowed for ARM home purchases and refinances, 97 percent, will be reduced to 90 percent.
Fortunately, ARM loans account for only about 5 percent of all originated loans and most of them have an LTV ratio that’s under 90 percent so this change shouldn’t have substantial impact.