Fannie Mae Tightens Guidelines On ARMs And Interest Only Products

For the first time this year, Fannie Mae announced significant updates to its mortgage underwriting guidelines.
The changes include newer, harsher ARM qualification standards, the elimination of a once-popular loan product, and tighter rules for interest only mortgages.
Fannie Mae made its official announcement April 30, 2010.  The changes will roll out to home buyers and homeowners in Philadelphia and everywhere else over the next 12 weeks.
The first guideline change is tied to ARMs of 5 years or less.
Mortgage applicants must now qualify based on a mortgage rate 2% higher than their note rate.  For example, if your mortgage rate is 5 percent, for qualification purposes, your rate would be 7 percent.
The elevated qualification payment will disqualify borrowers whose debt-to-income levels are borderline.
The second change is Fannie Mae's elimination of the standard 7-year balloon mortgage.  Balloon mortgages were popular early last decade.  Lately, few borrowers have chosen them, though.  Mostly because rates have been relative high as compared to a comparable 7-year ARM.
And, lastly, Fannie Mae is changing its interest only mortgages guidelines.
Effective June 19, 2010, Fannie Mae interest only mortgages must meet the following criteria:

1. The home must be a 1-unit property
2. The home must be a primary residence, or vacation home
3. The borrower's FICO must be 720 or higher
4. The mortgage must be a purchase, or rate-and-term refinance. No "cash out" allowed.

Furthermore, borrowers using interest only mortgages must show two full years of mortgage payments "in the bank" at the time of closing.
Earlier this year, Fannie Mae-sister Freddie Mac announced that as of September 2010, it will stop offering interest only loans altogether.
Between Fannie Mae, Freddie Mac, the FHA, and other government-supported entities, the U.S. government now backs 96.5% of the U.S. mortgage market.  So long as mortgage default rates are high, expect approvals for all borrower types to continue to toughen.

Simple Real Estate Definitions:Refinance

A mortgage is a contract between a lender and borrower, defining the terms by which a home loan must be repaid. 

The paperwork, signed by both parties, includes provisions for things like:

• The interest rate
• The length of the loan
• The amount of money to be borrowed

But, like all loans, a mortgage loan can be paid off at any time.  So, when market interest rates fall, homeowners will often exercise their right to an "early payoff" by securing a new loan that pays off the old one.

This process is most commonly known as a refinance.

A refinance is the changing of the loan terms against a property, often for a better interest rate or a lower monthly payment.  When the refinance process is complete, the original lender's loan is paid in full using the money from the new lender's loan and the former's relationship is officially terminated.

There's no rule against how many times a person can refinance, nor is there an easy way to determine whether or not a refinance makes sense.  In general, if you can reduce your monthly payment while limiting your closing costs, to refinance is a smart decision. 

However, there are other reasons to refinance, too, including:

1. To convert from an ARM into a fixed rate mortgage (or vice versa)
2. To extract equity for paying off third-party debts or for cash
3. To extend a loan from 15 years to 30 year for payment relief

Because there are fewer third-parties involved with a refinance, it's often simpler and less expensive than a comparable purchase transaction.  The paperwork stack is often smaller, too.