Mortgage Delay Does Not Pay: New Approval Guidelines Effective September 1, 2009 Will Make it Tougher for Many Borrowers

Here we go round again.   Effective September 1, 2009, Mortgage Approval Guidelines are set to change.   Sorry, most changes are not to your benefit Mr/Ms Borrower.

It would seem to go against the grain at a time when there is a push for purchase activity and helping people save their homes. But once again this year, changed guidelines will make it tougher or impossible for some people to refinance or buy a home.

Fannie Mae says changes must be made due to surging unemployment, mortgage fraud, and an unstable market.  Any fencesitters who only wanted “their” deal or no deal might surely end up now with “no” deal for a while.  That is unfortunate.  Toying around in the mortgage market in unstable times can be more dangerous than dabbling in stocks because the effect can last for many years and involve hundreds of thousands of dollars.

These changes are major.  Here are a few:

1. Credit, income and asset documentation can’t be more than 90 days old.  Used to be good for 120 days.
2. Lenders must compare actual federal tax returns from the IRS to a borrower’s supplied income documentation. Previously, this review step was at the lender’s discretion.
3. “Tip” income for service persons must be documented and verified.
4. Trailing secondary wage earning is now prohibited. This means that if a spouse is relocating to another city, we cannot use the other spouse’s “expected” income until that spouse actually has a job in the new area.
5. Bonds, stocks, and mutual funds are “worth” 70% of their current market value for purposes of required reserve funds.  Previously, securities were used at 100% of value.
6. Retirement assets are counted at 60% of their current market value.  Previously, retirement assets were taken at 70% of value.
7. The 2-unit property snag:   Used to be that Fannie Mae viewed 2-units homes as “safe”, assigning them the same liberal underwriting policies as for a single-family home.  No more.  Owners and new buyers of 2-unit homes now face higher minimum FICO (credit score) requirements and lower maximum LTVs (meaning a higher down payment to purchase or more equity to refinance).   If you are buying a 2-unit property, you will need a 20% down payment and a 640 credit score.  The same requirements will apply for those who want to refinance w/o getting cash back ( a rate/term refinance).  These are guidelines for a primary residence 2- unit, not an investment property.  Investment property criteria is more stringent.
8. Refinancing a 2 unit home with cash out:  Borrowers must have 25% equity and a minimum 680 credit score.  The outcome:  Fewer 2-unit mortgage applicants will qualify for mortgages – meaning both fewer 2-unit home sales and even fewer 2-unit refinances.  These are guidelines for a primary residence 2- unit, not an investment property.
9. Certain costs that are paid outside of closing (POC) and early in the application process, such as lock-in fees, origination fees, commitment fees, credit report fees, and appraisal fees, can be charged to the borrower’s credit card. Currently, Fannie Mae limits the amount of these fees based on the type of fee being paid.  This policy is being modified to now allow credit card financing for the payment of common and customary fees paid outside of closing up to a maximum of 2 percent of the loan amount (with stipulations).   Credit card financing cannot be used for the down payment.

Complete guidelines are here.

FHA is still an option for many borrowers and buyers who get shut out by these guidelines.  Don’t give up or make presumptions without speaking to an expert.

Tagged as: Mortgage Underwriting, Purchasing a New Home