Fannie Mae has just instituted sweeping changes on how conventional loans are approved, making it easier for more creditworthy borrowers to access mortgages and improving the ability for those already qualified to borrow more. It is expected that with the relaxed mortgage guidelines, that 100,000 more applicants will be approved each year.
As of July 29, Fannie Mae is now allowing mortgages with higher debt-to-income ratios, higher loan-to-value ratios, and issuing more no-appraisal approvals—among many other significant changes—which will make qualifying for a loan under the latest Desktop Underwriter® (DU) release, DU 10.1, less strict and simplified.
While the increases in debt-ratios and eased automated risk assessments affect every borrower, there are some groups who will feel a greater impact for one reason or another.
Expect to see more approvals for borrowers who are self-employed, or starting new employment, or burdened with student loans, or burdened with alimony, or burdened with disputed credit accounts, or burdened with timeshare issues, as well as members of some minority groups who more frequently fall into a higher debt-to-income range. These changes will have a great effect on a wide range of Americans.
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Key Mortgage Guideline Improvements
Are you planning to apply for a loan? Here are highlights of changes Fannie Mae just rolled out that will make it easier for you this time around:
1. DU® Risk Assessment
2. Maximum Allowable DTI
3. Disputed Tradelines
4. ARM LTV Ratios
5. Self-Employment Income Documentation
6. DU® Validation Service
7. Property Inspection Waiver
DU® Risk Assessment
DU® 10.1—Fannie Mae’s automated approval system—released July 29, 2017, has a more relaxed risk assessment when evaluating borrowers’ seeking conventional loans.
The new risk assessment platform will result in more loan applicants receiving an “Approve/Eligible” recommendation from DU® with no other changes to their credit profile.
Maximum Allowable DTI
The cornerstone of Fannie Mae’s relaxed loan risk assessment and analysis is the higher maximum allowable debt-to-income ratio.
Fannie Mae has adjusted the maximum allowable DTI to 50%. Those with ratios ranging between 45% and 50% can apply for a conventional loan without being asked for additional compensating factors by DU®. If the DTI exceeds 50%, DU® will issue an Ineligible recommendation.
Per Fannie Mae guidelines, the adjusted maximum DTI ratio will not apply to (i) DU® Refi Plus loans where higher DTI ratios have been permitted and (ii) manually underwritten loans that have lower DTI limits.
Disputed Tradelines
Fannie Mae has introduced a new albeit easier way for borrowers with accounts in dispute to receive an “Approve/Eligible” recommendation, or to quickly work their way toward loan approval should they get an “Ineligible” recommendation.
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If a loan application receives an “Approve/Eligible” recommendation despite having an account in dispute—no further action is necessary and the loan can close as is.
When an “Approve” recommendation is not issued based on disputed accounts, the lender can still assess the accounts to determine if the account belongs to the client and if not, then no further action is required. If the account does indeed belong to the borrower, then the lender may manually underwrite file if it is eligible for manual underwriting.
Medical debts, as always, will be excluded from the credit assessment.
ARM LTV Ratios
Loan-to-value, combined loan-to-value and high combined loan-to-value limits (LTV, CLTV and HCLTV respectively) for adjustable-rate mortgages (ARMs) have been increased across all transaction types to be on par with LTV, CLTV and HCLTV limits of fixed-rate mortgages.
The LTV limits on ARMs were 10% lower before changes, but now have been brought back in line with fixed-rate mortgages at 95%.
Self-Employment Income Documentation
Fannie Mae’s latest update opens the door for more self-employed borrowers to be eligible for conventional financing.
In a departure from requiring nearly every self-employed borrower to qualify with two years of self-employment income documentation, many self-employed applicants will be issued an approval based on only one year of personal and business tax returns.
DU® Validation Service for Income and Employment
Under the latest DU®, the income and employment validation service will more efficiently validate income and employment for a borrower that has both self-employment income that can be validated using tax transcript information and base, bonus, overtime, and/or commission income that can be validated using an income report.
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Property Inspection Waiver
DU® 10.1 will issue far more property inspection waivers (PIWs) than earlier releases. PIW is an offer to waive the appraisal for certain refinance transactions. Fannie Mae now has in its database more than 26 million appraisal reports, making it possible to analyze and determine a minimum level of property valuation, and ultimately assess the reasonableness of a lender’s estimated property value.
With the increased utilization of PIWs, borrowers will benefit from no-appraisal transactions where it makes sense; thus, reducing loan origination costs and eliminating appraisal-related delays.
Transactions eligible for Property Inspection Waivers are:
- Owner-occupied, second homes, and investment properties
- One-unit properties, including condos
- Limited cash-out refinances up to (i) 90% LTV ratios for primary and second homes and (ii) 75% LTV ratios for investment properties
- Cash-out refinances up to (i) 70% LTV ratios for primary residences and (ii) 60% LTV ratios for second homes and investment properties
- Loan casefiles that receive an “Approve/Eligible” recommendation from DU®
100,000 New Applicants to Be Approved Each Year
The significance of the latest changes is great, and they are additive to many other changes that have been rolled out over the past year to include solutions dealing with student loans, borrowers paying alimony, debts paid by others, and new employment offers or contract situations to name just a few.
Simultaneously to these major changes, Americans’ credit scores are on the rise with a new all-time high average score of 700 and more positive improvements occurring with regards to derogatory information dropping from consumer reports. Add to that the continuation of historically low interest rates and high home values and you can see great benefit being available to potential homebuyers and homeowners alike.
Nearly 100,000 borrowers will benefit from Fannie Mae’s allowance for higher DTI ratios and relaxed risk assessments according to the Urban Institute. The study shows that a disproportionate share of these new qualified borrowers will likely be black and Latino families since these families are currently 1.5 times more likely to have DTI ratios above 45%–Fannie Mae’s previous maximum allowable DTI ratio. These changes are all encompassing and will help all Americans improve their financial circumstances.
Fannie Mae is truly doing their part to make changes that simply make sense and to aid qualified borrowers who have some of the most popular roadblocks preventing them from buying a home or refinancing into a better loan.
The totality of the many changes is allowing many people who did not qualify before to now qualify. Buying a home for the first time or enjoying $350 – $2,500 in savings per month is now within reach for so many more Americans.
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