As of December 12, 2009, Fannie Mae has introduced its new DU (Desktop Underwriter) Version 8.0, which all lenders are now required to use for conforming and high-balance conforming loan products (to $417,000 and up to $729,750 in high-limit counties such as Marin and San Francisco) that it purchases. The new system imposes more restrictive lender guidelines and is expected to limit the number of borrowers who will qualify for a loan. Since the majority of loans in this price range are sold through either Fannie Mae or Freddie Mac, even the most qualified borrowers shopping for a home should have their approvals updated to insure that their loan packages are in compliance with current guidelines.
Fannie Mae and Freddie Mac regularly review and adjust their respective underwriting systems for credit risk assessment to limit mortgage defaults. One significant restriction of the new system is that debt-to-income (DTI) ratios will now be limited to 45%. The DTI ratio is calculated by adding all proposed mortgage principal and interest payments, property taxes, hazard insurance and/or homeowner dues, along with all liabilities listed on a borrower’s credit report and dividing the sum against their income. Up until last week Fannie Mae was approving ratios as high as 65%, allowing the same buyer to afford a much higher purchase price. With strong compensating factors, a prospective borrower’s DTI ratio may be accepted to 50% on the $417,000 conforming product; those requiring financing to the high-balance limit of $729,750 will be strictly held to the 45% limit.
In general, Fannie Mae’s increased restrictions affect most property and loan categories. Minimum credit scores will be held to 620 and loan-to-value (LTV) ratios have been reduced or now require higher credit scores. For example, purchases of two-unit principal residences or investment properties have had their LTVs reduced from 95% and 85%, respectively, to just 80% and 75%. Borrowers’ assets are now being more severely discounted, making it harder for some borrowers to meet a loan program’s reserve requirements. Retirement assets have been discounted from 70% to 60% of holdings and stocks and mutual funds have been reduced from 100% of their valuations to 70%.
Depending on one’s qualifications, some buyers may find relief through Freddie Mac’s system, which is more forgiving in some areas. In the coming months, however, Freddie Mac is expected to adopt many of Fannie Mae’s measures. Although home prices and historically low mortgage rates remain extremely attractive to prospective buyers, it is more important than ever to present as solid a loan package as possible.
Nicholas Ballard is both a mortgage broker and banker specialized in the residential Marin market. For assistance, please call or e-mail:
Nicholas Ballard: 415-526-1941; firstname.lastname@example.org
Real Estate Financing
CA Dept. of Real Estate #01356374
California Mortgage Advisors, Inc.
CA Dept. of Real Estate #01170868
Redwood Highway, San Rafael