Mortgage Guidelines
Loan Application Alert : Conforming, Interest Only Mortgages Guidelines Change Next Week
If you plan to finance your Logan Square home with a conforming interest only mortgage, get your loan application submitted no later than this Friday, June 18.
Starting next week, Fannie Mae is clamping down on the popular loan product.
An “interest only” mortgage is exactly what its name implies — a mortgage for which the monthly payments consist entirely of interest with no principal reduction. Because there’s no amortization, payments are less costly on a month-to-month basis.
For example, assuming principal + interest payments at 5 percent, a $250,000 mortgage carries a monthly payment of $1,342. The payment on a comparable interest only mortgage, however, drops to $1,042.
That’s a payment difference of $300 and the size of the cost savings, not surprisingly, is the biggest reason why Fannie Mae is making its changes.
In its official announcement, Fannie Mae says it wants the give the interest only option to “borrowers who are in a position to choose it as a financial management tool” rather than allowing homeowners use it as an affordability tool for their budgets.
Going forward, there are new minimum standards for interest only home loans.
- Applicants must have a 720 credit score or better
- Applicants must have at least 24 months of reserves
- The property type may not be a 2-unit, 3-unit or 4-unit
- The property must be a primary residence, or vacation home
Furthermore, only purchase and rate-and-term refinances are eligible. Cash out refinances are prohibited.
Interest only home loans aren’t for everyone, but if you plan to finance with a Fannie Mae mortgage and interest only is your preference, get your loan application submitted as soon as possible. Starting Monday, approvals will be tougher to come by.
Fannie Mae’s Loan Quality Initiative : Repulling Your Credit Just Before Closing
A new loan quality initiative from Fannie Mae is making it harder for Logan Square home buyers and refinancing homeowners everywhere to close on a mortgage.
Beginning June 1, 2010, with all new applications, Fannie Mae wants lenders to verify that borrowers have not taken on new debt during the underwriting phase of the mortgage.
If new debts are found, the mortgage is subject to a re-underwrite and a possible turndown.
For Fannie Mae, the goal is to reduce the number of loans that go bad because of new, non-disclosed debt. Lenders have the freedom to verify in whatever manner they wish, but in most cases, the verification process will amount to a credit re-pull made just prior to closing.
The underwriters will be looking for 3 things in particular — even after your loan is approved.
First, your updated credit report will show your current credit card bills and minimum monthly payments. Those numbers will replace your original numbers made at the time of application. If the debts exceed a certain threshold, your loan will be denied.
Second, underwriters will be looking at your updated credit score. If your FICO has dropped below minimum lending standards, your loan will be denied. Or, you may be subject to a new loan-level pricing adjustment.
Loan level pricing adjustments are mandatory loan fee based on your credit score.
And, lastly, underwriters will be looking at your credit report’s Credit Inquiry section. The goal is to see if you’ve been applying for credit elsewhere. Underwriters can use this information at their discretion.
Fannie Mae’s Loan Quality Initiative is just one more way that the government-backed group is trying to improve its loan pools. Unfortunately, it’ll mean more turndowns for mortgage applicants.
Therefore, take extra care of your credit between the time of application and the time of closing. Don’t buy new cars, don’t buy new appliances, and — most definitely — don’t open new credit cards. Be extra safe with your credit because a mortgage application that’s supposedly cleared-to-close can be revoked at the eleventh hour.
When in doubt, talk to your loan officer about what may or may not trigger the Loan Quality Initiative. Your loan approval is at stake.
Fannie Mae’s Loan Quality Initiative : Repulling Your Credit Just Before Closing
A new loan quality initiative from Fannie Mae is making it harder for Chicago home buyers and refinancing homeowners everywhere to close on a mortgage.
Beginning June 1, 2010, with all new applications, Fannie Mae wants lenders to verify that borrowers have not taken on new debt during the underwriting phase of the mortgage.
If new debts are found, the mortgage is subject to a re-underwrite and a possible turndown.
For Fannie Mae, the goal is to reduce the number of loans that go bad because of new, non-disclosed debt. Lenders have the freedom to verify in whatever manner they wish, but in most cases, the verification process will amount to a credit re-pull made just prior to closing.
The underwriters will be looking for 3 things in particular — even after your loan is approved.
First, your updated credit report will show your current credit card bills and minimum monthly payments. Those numbers will replace your original numbers made at the time of application. If the debts exceed a certain threshold, your loan will be denied.
Second, underwriters will be looking at your updated credit score. If your FICO has dropped below minimum lending standards, your loan will be denied. Or, you may be subject to a new loan-level pricing adjustment.
Loan level pricing adjustments are mandatory loan fee based on your credit score.
And, lastly, underwriters will be looking at your credit report’s Credit Inquiry section. The goal is to see if you’ve been applying for credit elsewhere. Underwriters can use this information at their discretion.
Fannie Mae’s Loan Quality Initiative is just one more way that the government-backed group is trying to improve its loan pools. Unfortunately, it’ll mean more turndowns for mortgage applicants.
Therefore, take extra care of your credit between the time of application and the time of closing. Don’t buy new cars, don’t buy new appliances, and — most definitely — don’t open new credit cards. Be extra safe with your credit because a mortgage application that’s supposedly cleared-to-close can be revoked at the eleventh hour.
When in doubt, talk to your loan officer about what may or may not trigger the Loan Quality Initiative. Your loan approval is at stake.
The Right Way To Take A Cash Gift For Downpayment
As lenders tighten mortgage guidelines for Logan Square home buyers, minimum downpayment requirements are increasing. Several years ago, you could finance a home with nothing down. Today, most conventional mortgages require at least 10 percent.
Anecdotally, guideline changes have led to an increase in the number of home buyers accepting cash gifts from family.
Gifts are allowed in most cases but the problem is, if you don’t accept the gift in a “lender-friendly” way, the mortgage underwriter could reject it, and negate it.
You can’t just deposit a cash gift into your bank account. You have to follow a series of steps and keep records.
- Provide an acceptable gift letter signed by all parties
- Provide documentation of the gifter’s withdrawal of funds via teller receipts
- Provide documentation of the giftee’s deposit of funds via teller receipts
Lenders require these 3 steps for two basic reasons. First, they want to make sure that the cash gift is “clean” (i.e. not laundered). Second, they want to make sure the gift is really a gift and not a loan-in-disguise.
It’s why lenders typically require that the loan application be accompanied by a signed, dated letter.
For example:
I am the [relationship to recipient] of [name of recipient] and this letter serves as evidence that I am gifting [name of recipient] [amount of gift] to be used for the purchase of the home at [complete address of property].
This is a gift — not a loan — and there is no expectation of repayment.
Signed,
[Signature of gifter]
As an additional step, home buyers receiving cash gifts should make sure that gifted funds are not commingled at the time of deposit. If the cash gift is for $10,000, therefore, the bank’s deposit slip should indicate that a $10,000 deposit was made — nothing more, nothing less. Don’t add a random $100 deposit to the transaction, in other words. The $100 deposit should be a separate transaction.
It’s also worth noting that gifting funds between family members can create both legal and tax liabilities. If you’re unsure about how donating or receiving a gift may impact you, call or email me directly. If I can’t help you with your questions, I can refer you to somebody that can.
Your Mortgage Approval Isn’t Final Until It’s Funded
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 your real estate agent and your loan officer and put together a game plan.
The best way to beat the mortgage system is to know the rules before you start to play.
1 In 8 Banks Tightened Prime Mortgage Standards Last Quarter
The Federal Reserve says that financial markets “remain supportive of economic growth“. Residential mortgage guidelines, however, continue to tighten.
If you’ve applied for a home loan recently, you probably felt it; extra scrutiny on income, assets and credit scores, among other things. The hard proof of the changes, however, can be found in the Federal Reserve’s quarterly survey of its member banks.
Every 3 months, the Federal Reserve asks senior bank loan officers around the country whether their respective banks’ “prime” residential mortgage guidelines tightened since the last survey.
For the period January-March 2010, 1 in 8 banks surveyed toughened their qualification standards.
Only 4% loosened them.
When we account for the Fed’s survey in conjunction with new underwriting standards from Fannie Mae and FHA, it’s clear that getting approved for a mortgage in 2010 is more difficult than at any time in recent memory.
Today’s homeowners and home buyers in Logan Square have taller hurdles to leap:
- Minimum FICO scores are higher
- Downpayment/equity requirements are larger
- Debt-to-Income thresholds are smaller
In other words, mortgage rates may stay low throughout 2010, but that won’t matter to homeowners failing to meet the new, minimum eligibility standards as set forth by the lenders.
If you’re among the many people wondering if now is the right time to buy or refinance a home, remember that — along with a probable increase in mortgage rates — mortgage approvals are getting more scarce.
The best home price or mortgage rate in the world won’t matter if you’re ineligible for financing.
Contact Me:
Brian Guzman
(312) 804-5557
(773) 935-4466
brian.guzman@cbexchange.com
1457 W. Belmont Ave.
Chicago, IL 600657
Brian Guzman celebrated the start of his 3rd year as a real estate consultant by joining @properties in the Spring of 2007. He holds previous experience with two real estate firms in the River North and Lincoln Park neighborhoods. He was a highly valuable member on a team that produced over $100 million in sales in 2006. Brian strives for unmatched service and complete satisfaction in every transaction that comes his way. Whether you are a buyer or seller, he has the knowledge, experience, and determination to surpass your expectations. Brian is loaded with the latest marketing materials, strategies, methods, and company support that will fulfill your real estate needs and goals. He believes there is no limit to the amount of service and representation he can provide.
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