Wednesday, August 9, 2017

Conventional Loan Updates - Fannie Mae Guideline Changes

Great news, Fannie Mae implemented some changes last week for its conventional loans that will help expand credit and ease guidelines.  These changes may have a BIG IMPACT (upwards) on what homebuyers qualify for.  Below is a brief overview on a few of these changes:

More conventional loans will allow for 50% debt-to-income (DTI) ratios (previously capped off at 45%)
Other than cash, DTI ratios are the main constraint when getting homebuyers qualified at their desired purchase price.  The 5% increase in DTI ratios can greatly boost purchasing power.  Using a $300K purchase price, the additional 5% increase in ratios can boost purchasing around $35,000-$45,000.  Therefore, a borrower who previously was pre-approved at $300K may now qualify upwards to $345K…  sweet! 

This change applies to all Fannie Mae conventional loans ran through their loan system.  This means Fannie Mae’s 3% down HomeReady loan program will allow for 50% DTI ratios.  The 3% down loan is not just for first time homebuyers but there are annual income restrictions which are $74,700 in the Portland-metro area.  Some neighborhoods are classified as “no-income” areas which means there are no “income restrictions” for that neighborhood.  If you have a specific property in mind, you can use: https://homeready-eligibility.fanniemae.com/homeready/ to find the applicable income limit for that property.

Fannie Mae will now start allowing Income Based Repayment (IBR) terms for student loans
Previously we had to use the higher of 1% of the outstanding balance or the payment reported on the credit report.  IBR payments are usually lower than the 1% method so this will help homebuyers with IBR education loans qualify at higher price points. 

As an example, a homebuyer may have $25K in education loans.  That equates to $250/month in obligations under the 1% method.  However, IBR payments on $25K of education loans may only be around $100-125/month.  Now if the credit report shows a lower monthly payment, we can use that instead of the 1% method!

Starting September 1st, Fannie Mae will allow 5% down on Adjustable Rate Mortgages (ARMs)
Previously, ARM loans required a minimum 10% down.  By cutting this down payment requirement in half, more homebuyers will have access to ARMs.  Many first-time homebuyers and repeat buyers are purchasing homes with less than 10% down.  If a homebuyer thinks they may want to buy a bigger and better home in 5, 7, or 10 years down the road, an ARM loan may be a great option to lower the interest rate and cut costs.  This change will go into effect September 1st, 2017.

Alimony as a reduction to income rather than debt obligation 
Alimony used to be classified as a debt obligation for Fannie Mae, but they have changed the guidelines to make this a reduction in income.  This is positive news to DTI ratios! 

As an example, a homebuyer has $1,000/month in alimony payments at a 43% DTI ratio.  The new calculations may drop this ratio to 34%, a 9% reduction in DTI ratios.  This small change may help the homebuyer qualify at a $100K higher home value.  WOW!  Sometimes small changes make the biggest impact. 

These are some of the biggest adjustments Fannie Mae implemented.  For a full list, please visit Fannie Mae's website. 

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