Understanding the details of mortgage qualification is crucial to long-term financial success. You don’t have to be a mortgage guru, but you do need to understand the various details that affect how you qualify.
Recently, Fannie Mae made adjustments to their selling guide. While the official documents can be a little tough to navigate, we’d like to breakdown the essential points and help you understand the most important details…
Fannie Mae Selling Guide Updates
Debt-to-Income Ratio Increases
One of the most basic factors considered by lenders is your debt-to-income ratio, which basically looks at how much you owe compared to how much you earn. The ratio is best calculated monthly. Here’s a simple example: if your outgoing debt payments total $2,000 monthly, and you make $4,000 a month, your debt-to-income ratio is 50%. (2,000 is 50% of 4,000.) If your debts are only $1,000, your ratio would be 25%. (1,000 is 25% of 4,000.)
Fannie Mae is hoping to simplify the guidelines by allowing debt-to-income ratios between 45 to 50% to receive an approved or eligible status. This will, of course, still consider other risk factors.
What this means to you:
Essentially, this means that if your debt-to-income ratio is near 50%, you may still be able to qualify.
Loan-to-Value Ratio Increases for ARM Loans
An adjustable-rate mortgage (ARM) loan is used by many different borrowers to achieve various home-ownership and financial goals. Fannie Mae is now making adjustments to the required “loan-to-value ratio,” bringing it up to a maximum of 95%, which should make loans more accessible.
The loan-to-value ratio is used to describe the amount of the loan compared to the value of the property. This is used to protect lenders if they need to recover the house due to default. If a home’s appraised value is $500,000, and the loan is for $400,000, the loan-to-value ratio is 80%. (400,000 is 80% of 500,000.)
What this means to you
You may be able to get an ARM loan that covers a larger percentage of the total property value, but not the entire value.
Expansion of Employment Offers or Contracts
Fannie Mae has allowed lenders to consider official employment offers and contracts, but the borrower previously had to start employment before the loan was delivered. The policy is now being updated allow delivery of the loan before employment starts, assuming various criteria are met. The employment offer cannot come from a family member or interested party, the borrower must qualify using only fixed-base income (no commissions or tips can be factored), and the employment must start a within 90 days of delivery.
What this means to you:
If you have received an official employment offer with documentation, you may be able to get a Fannie Mae loan before starting the job.
Fidelity Bond and Errors and Omissions
Fannie Mae has specific requirements for fidelity bond and errors and omission insurance, which had not been updated for 20 years. They introduced a cap on fidelity bond coverage, added errors and omission caps, and updated certain points.
What this means to you:
If you (or your business) has fidelity bond insurance or errors and omissions insurance, you’ll want to review the new details with a qualified professional, such as an accountant or attorney.
Disputed Lines of Credit
Fannie Mae calls this “disputed trade lines.” What they are essentially saying is that if a borrower has certain information on the credit report that they are disputing, the in-dispute information will still be considered, but the lender will have specific steps to follow.
What this means to you:
You will still be able to apply for loans even when you are disputing credit information (such as outdated or inaccurate information), but the lender will have specific steps to complete the investigation.
Timeshare Accounts
Previously, timeshares could be identified in a borrower’s credit report as either installment or mortgage-related debt, depending on the nature of the timeshare. However, all timeshares will now be considered as installment loans for Fannie Mae, even if they are identified as mortgage loans on other credit reports.
What this means to you:
If seeking a Fannie Mae loan, your timeshare payments will be considered installment loans, not mortgage, which could affect your score in various ways.
Simplification of Document Custody Requirements
This is a very basic update that essentially eliminates some duplicate content in various guides offered by Fannie Mae. Hoping to simplify the guides, Fannie Mae removed guide content that applies to document custodians found in their Requirements for Document Custodians. The remaining content was rewritten and simplified, and various points were clarified.
What this means to you:
Not much, other than you will find areas addressing document custodians have moved and been simplified.
Student Loan Clarifications
Fannie Mae also hoped to clarify and simplify some points related to student loans, specifically how lenders handle a student loan with a missing or $0 payment amount. Now the lender can use documents stating that the monthly student loan payment is $0 to help qualify the borrower.
What this means to you:
If you have an existing student loan with a $0 payment (due to deferral, for example) you may be able to qualify for a loan if the $0 payment comes from an income-driven repayment plan.
Alimony Treatment
Fannie Mae wants to give more flexibility to the treatment of alimony paid by the person seeking a loan. Lenders can now reduce monthly alimony payments from the applicant’s qualifying income or treat it as debt.
What this means to you:
If you pay alimony, you can either deduct the monthly total from your income or add the amount to your monthly debt, depending on the situation. This can have an impact on your debt-to-income ratio numbers.
Mortgages Paid by Others
The requirements for excluding mortgage payments paid by another person from debt-to-income ratios are now simplified. However, the person making the payments must be officially responsible on the mortgage and must document that they have made the payments over the past 12 months.
What this means to you:
If your name is on a mortgage, but you are not the person who is actually paying, it is possible to exclude these total from your monthly debts.
