Fannie Mae rolls out new mortgage guidelines Monday. Therefore, if you’re in the process of applying for a conforming home loan, consider giving your complete application by the close of business Friday.

All Fannie Mae applications taken on, or after, December 13, 2010, are subject to the changes.

As compared to mortgage guidelines updates of the last 3 years, Monday’s roll-out is relatively small. There is no change to the maximum debt-to-income ratio, for example; nor is there an increase in the minimum FICO score requirement.

Most mortgage applicants in Houston and nationwide will be unaffected.

Others, however, will find getting approved to be more difficult.

The most major change is with respect to revolving and installment debt. This category includes credit cards, charge cards, and student loans, among others. Going forward:

1. Debt with fewer than 10 payments remaining must now be included in an applicant’s monthly obligations.
2. Debt not reporting a monthly payment must be assigned a payment equal to 5% of the outstanding credit balance.

These edits will raise applicants’ debt-to-income ratios, and may push some of them beyond the maximum allowable limits, resulting in a denial. People with relatively large car payments are especially susceptible.

Another change relates to receiving gift funds for a purchase. Unlike debt calculations, though, the “gifting” process is getting easier.

Under the new Fannie Mae guidelines, buyers of owner-occupied, 1-unit properties (i.e. single-family homes, condos, townhomes) can forgo Fannie Mae’s customary, minimum 5% downpayment contribution from personal funds. Downpayments can be comprised 100 percent of gifted and/or granted monies.

Buyers of second or investment homes, or multi-unit properties must still make a 5% downpayment from their own funds.

And, lastly, Fannie Mae is easing some of its documentation requirements. Salaried applicants from whom commissions and/or bonuses paid account for less than 25% of annual income will have fewer paystubs to produce for underwriting.

Fannie Mae’s complete guideline changes are available online at http://efanniemae.com.

It’s getting tougher to get approved for a mortgage. Still.

In its quarterly survey of senior loan officers around the country, the Federal Reserve asked whether “prime” residential mortgage guidelines” have tightened in the prior 3 months.

A “prime” borrower typically carries a well-documented credit history with high credit scores, has a low debt-to-income ratio, and uses a traditional fixed-rate or adjustable-rate mortgage.

For the period July-September 2010, 52 of 54 responding loan officers admitted to tightening their prime guidelines, or leaving them “basically unchanged”.

Just 4% of banks loosened their lending standards.

If you’ve applied for a home loan lately — for either purchase or refinance — you’ve likely experienced the effects of the last 4 years. Because of delinquencies and defaults, today’s mortgage underwriters are forced to scrutinize income, assets and credit scores, among other facets of an home loan application.

Mortgage applicants in Houston have higher hurdles to clear:

• Minimum credit scores are higher versus last year
• Downpayment/equity requirements are larger versus last year
• Debt-to-Income ratios must be lower versus last year

In other words, although mortgage rates are the lowest they’ve been in history, qualification standards are not.  Minimum eligibility requirements are tougher, and appear to be toughening still.

If you’re among the many people wondering if now is the right time to join the Refinance Boom, or to buy a home, consider that, while mortgage rates may fall further, eligibility standards may not.

Low mortgage rates don’t matter if you can’t qualify for them.

Starting Monday, December 13, 2010, Fannie Mae is changing its mortgage lending guidelines.

For some mortgage applicants of Texas , the loan approval process will simplify. For others, it will toughen. How you’ll be affected personally will depend on your credit profile and your loan characteristics.

Among the biggest changes from Fannie Mae is a new set of guidelines for gift funds. When the new rules roll out, accepting cash gifts for downpayment will be easier.

Under the new guidelines, buyers of owner-occupied, 1-unit properties (i.e. single-family homes, condos, townhomes) can forgo Fannie Mae’s typical, minimum 5% personal downpayment contribution. Downpayments on homes meeting the above criteria can be comprised of 100% gifted and/or granted funds.

Buyers of second homes and multi-unit properties, however, are not exempt.

There’s also two changes pending with respect to revolving debt.

1. Debt with less than 10 payments remaining may no longer be waived in debt-to-income ratio calculations
2. Debt lacking a monthly payment on credit must be assigned a payment equal to 5% of the outstanding balance

Both of the above should increase the number of loan denials in 2011.

And, lastly, Fannie Mae changes some of its documentation requirements, the most noticeable of which will be with respect to income verification. Salaried workers and applicants whose commission/bonus accounts for less than a quarter of their income will have fewer paystubs to produce for underwriting.

Loan applications taken prior to December 13, 2010 are exempt from the new rules.

Fannie Mae’s complete guideline changes are available online at http://efanniemae.com.

The tightening in mortgage-lending policies that characterized the last 3 years appears to be slowing.

According to the Federal Reserve’s quarterly survey of senior bank loan officers, roughly 1 in 10 lenders added mortgage qualification hurdles between April and June. It’s a huge departure from just 2 years ago when the mortgage industry was facing its first wave of challenges. 

During that period, eight in 10 lenders added hurdles.

For mortgage applicants in Houston , this quarter’s Fed survey results signals that mortgage lending may have reached its limits of restriction.

Since 2007, mortgage guidelines have become increasingly restrictive. There’s extra scrutiny on assets and tax returns; employment history is given more weight; loan purpose matters.  There’s a bevy of traits that can stand between you and an approval that didn’t exist a few years ago.

That said, lots of homeowners are still getting loans.

Verifiable income, good credit scores and equity are the “magic formula” and banks want to lend to good credit risks. And the best news for those that qualify is that mortgage rates are fantastic right now.

According to Freddie Mac, mortgage rates are as low as they’ve been in history.

So, if you’re among the many wondering if now is the right time to buy a home — or refinance one — remember that, although mortgage guidelines likely won’t get worse, mortgage rates probably will.

A mortgage approval is never final until it’s funded.

A host of things can “go wrong” while your home loan is underway. Some are in your control, many more are not.  And just being aware of some potential pitfalls could help save your loan down the road, and your peace of mind today.

MSN Money ran a summary piece on the topic titled “10 Things That Can Kill A Home Loan“.

It’s an excellent article because, unlike most “get approved” articles that advise against things like buying a car before closing, or opening a bunch of new credit cards, the MSN Money piece addresses more uncommon factors that can lead to a similar loan turndown.

For example, a home may be unfundable if it’s unsuitable for human habitation — a condition you may not discover until after a thorough home inspection’s been made. Broken windows, lack of plumbing, and/or major foundation damage are all deal-breakers with a lender.

Either fix the home prior to closing, or don’t close at all.

Homes in “declining markets” have danger spots, too. Especially for conforming mortgage applicants with less than 20% equity.

Because of how private mortgage insurers operate, some homes carry tougher, ZIP code-based PMI eligibility requirements. As a mortgage applicant, it’s important to understand this because you may be PMI-eligible in one neighborhood, but not in another.

There’s others ways in which a mortgage approval can go bad, too:

• You’re self-employed and your income was lower last year versus the year prior
• Your tax return shows large amounts of unreimbursed employee expenses
• You failed to return required paperwork to the lender within a reasonable time frame

Mortgage approvals are delicate and, despite an improving economy, lenders still operate with caution. Talk with an experienced loan officer (me) and put together a game plan. More things can go wrong with that “lowest rate” offered by a rookie, rather than a market rate offered by a veteran.

The best way to beat the mortgage system is to know the rules before you start to play, and this is where I excel. If you have any questions regarding your specific situation, feel free to email me or give me a call. I can have an answer to you within the day.

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 Houston 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.

The voice of mortgage originators and housing professionals was broadcast loud and clear by Federal Reserve Governor Elizabeth Duke today.

Speaking at the Mortgage Foreclosure Policy Conference in Chicago today, Duke’s prepared speech, Envisioning a Future for Housing Finance, called attention to overtightened mortgage underwriting standards and pointed out the effects it was having on the housing recovery.

“Even taking into account the excesses of the bubble period, it appears that lenders have tightened underwriting terms so much that the lack of credit availability is at least partially an impediment to homeownership,” said Duke.

Duke highlighted the lack of available lending products:

“The scarcity of available mortgage lending at present–especially the lack of relatively low-down-payment products beyond the Veterans Administration (VA) and Federal Housing Administration (FHA) market–most hurts modest-income households who lack other assets. This makes it especially difficult for first-time and minority homebuyers to enter the market.”

She pointed out the fact that banks are missing an opportunity to lend to eligible borrowers because of over-tightened guidelines:

“Some would argue that most of the really risky behavior is now out of the market. But, unfortunately, the backlash has restricted a lot of perfectly responsible lending as well. Banks are reluctant to put any but the lowest possible risk loans in their portfolios. And the market for new private mortgage loan securitizations is essentially closed. Thus, borrowers face tight underwriting requirements, even if their own risk profile looks relatively “safe” by historical standards. Moreover, even homebuyers with the requisite down payment realize that their home equity is much less liquid than in the past. Once, borrowers could count on cash-out refinancing or home equity lines of credit as a means of cheaply accessing their home equity; these avenues are now much more restricted.”

Duke then outlined four principles we should focus on when evaluating mortgage reform proposals, here is an outline:

1. Adequate consumer protection.

First and foremost, any new system must contain adequate protections for consumers. In the aftermath of widespread abuses, consumers need to feel confident that they can satisfactorily negotiate a reasonable mortgage.

2. Transparency.

Second, there must be transparency at all levels. Retail products should be as transparent as possible, so that consumers find it easy to understand the terms and risks of their mortgages. Lenders and servicers should also make as much information as is reasonably feasible available to investors. Indeed, adequate information for due diligence is likely a prerequisite to attract capital back to the mortgage market.

3. Simplicity.

Third, the new system should encourage simplicity. Retail mortgage contracts ought to be as simple as possible. Too often, the complexity of mortgages has served to confuse borrowers and make it more difficult to make informed decisions. Similarly, the complexity of the securitizations into which mortgages were packaged made analysis difficult for investors. These structures turned out to be especially fragile when stressed with high defaults and subsequent losses. After the crash, with delinquencies rising, investors found modeling the cash flows under alternative scenarios confusing and uncertain. While complexity may prove to be an inevitable byproduct of financial innovation, investors will likely demand much simpler instruments going forward.

4. Properly aligned incentives.

Finally, the new system should feature clear roles and properly aligned incentives for all players. Too often in the recent turmoil, we saw examples of misaligned interests and competing objectives. For instance, there is evidence that some loan officers and mortgage brokers may have been as concerned about whether loans were profitable to them personally as they were about whether the borrower could actually repay.

She then went on to discuss what the new mortgage market structure might look like. Here is a summary:

1. Lending Practices.

Under Truth in Lending we also have recently proposed revised mortgage disclosure forms for all loans. Despite efforts to improve disclosures and ban egregious practices, obtaining a mortgage and purchasing a home is still a significant and complex transaction. Evidence indicates that consumer counseling, whether for pre-purchase or foreclosure prevention, leads to better outcomes for consumers.

2. Secondary Market

Whether the ultimate vehicle is covered bonds, loan securitizations, or some other model, a mechanism for channeling investment funds into housing finance will be critical to meeting the demands of a normally functioning housing market. Restoration of the residential housing finance market will require more than liquidity. At a minimum, it is likely to require access to information, standardized contracts, and simplified structures.

3. Servicers

Servicers have not always been the most visible part of the mortgage business. Responses to this current crisis, however, including attempts to make large-scale loan modifications, have pointed to the critical role that servicers play through their direct interaction with borrowers. Yet, there have been problems. Many servicers did not have–and some may still not have–adequate systems and personnel in place to deal with the sheer scale of the foreclosure crisis. Servicers are concerned about the competing interest of investors and the threat of litigation for pursuing alternatives to foreclosure. In turn, some investors have questioned servicers’ incentives.

In the future, servicer contracts will need to provide clear guidance and incentive structures that lead to transparency and certainty in loan modifications and other loss mitigation tools.

4. Fannie and Freddie

It would be unrealistic to expect the private mortgage market to rebound without defining the ongoing role of Fannie Mae and Freddie Mac. These government sponsored enterprises (GSEs) have continued to issue large quantities of securities even as private securitization faltered, apparently because investors have continued to believe that the government stands behind them. That experience suggests that, at least under the most stressed conditions, some form of government backstop may be necessary to ensure continued securitization of mortgages.

However, restarting the GSEs in their old forms would do nothing but ask for a repeat of recent history. Without getting into specific proposals today, I’ll simply say that whatever is the ultimate future for Fannie and Freddie, market participants will need to see a clear roadmap for both the individual institutions and the role of government in housing finance before private markets can begin to map a course for themselves.