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.

Mortgage Approvals Are Getting More And More Scarce

The economy's improving but lending standards are not. Nationally, banks are making mortgage approvals harder to come by.

Underwriting guidelines are tightening.

The data comes from the Federal Reserve's quarterly survey to its member banks. The Fed asks senior bank loan officers around the country to report on "prime" residential mortgage guidelines over the most recent 3 months and whether they've tightened.

For the period October-December 2009:

• Roughly 1 in 4 banks said guidelines tightened
• Roughly 3 in 4 banks said guidelines were "basically unchanged"

Just 2 of 53 banks said its guidelines had loosened.

Combine the Fed's survey with recent underwriting updates from the FHA and generally tougher standards for conventional loans and it's clear that lenders are much more cautious about their loans than they were, say, in 2007.

Today's Philadelphia home buyers and would-be refinancers face a bevy of new borrowing hurdles including:

• Higher minimum FICO scores
• Larger downpayment requirements for purchases
• Larger equity positions for refinances
• Lower debt-to-income ratios

So, if you're on the fence about whether now is a good time to buy a home, or make that refi, consider acting sooner rather than later. It doesn't necessarily matter that mortgage rates are low, or that there's an up-to-$8,000 home purchase tax credit for households that qualify. With each passing quarter, fewer and fewer applicants are eligible to take advantage.

New 2010 FHA Guidelines Give Buyers Reasons to Act NOW!

Securing an FHA mortgage in Pennsylvania and New Jersey is about to get more expensive.

In a statement issued last Wednesday, the Federal Housing Authority outlined policy changes to its mortgage assistance program. The shift is meant to both reduce the government group's portfolio risk while strengthening its overall financials.

For consumers, the changes mean higher costs.

As listed in the official announcement, there are 3 major guideline updates for the FHA:

1. Upfront mortgage insurance premiums are increasing to 2.25% from 1.75%



2. Minimum downpayments for applicants with sub-580 FICOs are rising to 10 percent



3. Seller concessions are being limited to 3%, down from today's allowable 6%

Furthermore, the FHA has appealed to Congress to raise an FHA borrowers' monthly mortgage insurance premiums.

To read the FHA's statement, it's clear what the group is trying to balance. On one side, the FHA wants to provide affordable financing to families that need it. That's its mission statement. On the other side, though, the FHA must manage the risk that comes with insuring lesser-quality loans.

To that end, the FHA is stepping up its enforcement of "bad lenders" in hopes of stopping problems where they start.

Also in its new policies, the FHA is introducing a "termination clause". If banks or loan officers that produce more than their fair share of bad loans, they lose their right to originate FHA mortgages.

As a result, homebuyers in Philadelphia and surrounding areas should expect tougher FHA underwriting in 2010. Not because the FHA says so, necessarily, but because banks don't want to do "bad loans". Lenders are incented to turn down at-risk applicants and, already, we're seeing examples of this. Despite FHA allowing 580 FICOs and lower, many banks have made 620 their minimum.

Some have other guideline overlays, too.

Even with these changes, the issues surrounding conventional loans made by lenders who are risk adverse and being scrutinized by federal regulators make FHA loans a pretty good alternative. Since the FHA's new guidelines don't go into effect until spring buyers have another reason to act quickly duting the next few months. First there was the tax credit program which ends April 30, 2010. Add to that the fact that between now and the spring, the old guidelines will apply. Therefore, if you know you're going to buy a home to take advantage of the tax credit, and you think you may need an FHA home loan in the next few months, consider moving up your time-frame.

If nothing else, you'll save some money at closing.