Changes coming on December 12th by Fannie Mae

On December 12th Fannie Mae will be making major changes to their automated engine Desktop Underwriter. DU findings are the basis for most of the loans that are funded today. Once a file is assessed in the DU underwriting engine and receives Approve/Eligible findings this loan can be done. The only thing that would keep this particular loan from closing is not being able to provide the documentation requested or the Loan Officer miscalculating or inputting incorrect information into the system. (this does happen by the way so it is imperative that your loan officer understand several important criteria)

So what changes can we prepare for or expect from Fannie Mae? Highlights of these changes include but may not be limited to the following:

• An Update to the DU Credit Risk Assessment
• An update to the Maximum Total allowable expense ratio (Debt to Income) to 45% with flexibilities to 50% for certain loan case files with strong compensating factors.
• Retirement of expanded level approvals EA II and EA III recommendations
• Minimum 620 fico score for delivery eligibility
• MI Updates
• o    A new minimum MI coverage option; a loan-level price adjustment (LLPA) will apply
  o    Streamlining of other MI coverage requirements
  o    Retirement of Reduced and Lower-Cost MI options
• Implementation of High Balance Mortgage Loan Eligibility Guidelines specified in a previous announcement
• Retirement of Homestyle construction to Permanent Financing
• Implementations from three previous announcements.

The focus of these changes should go to Debt to Income. For too long we have been allowing a total back end Debt to Income to 56.99% for FHA and in some cases exceeding that for conventional financing. For all intensive purposes this means that your Housing Payment plus debt that reports to the credit bureaus minimum monthly payments added together represent 56% of your total gross income.

If you are in a 30% tax Bracket and take home 70% of the gross it leaves you 14% of your gross for all other expenses. Other expenses that include food for a family of five which is at minimum $800 dollars a month. We have set people up for failure of home-ownership.

Why you might ask? California leaves very little option for new buyers. The Housing affordability based on average income and price for the area is still high. It is very difficult to get a home that would meet the needs of a family of five in a location, near to schools on the average household budget. This would be significantly easier if we were taught about finances more accurately growing up and did not have the worldly pressures to keep up with the Joneses.

See it as good news – This may change the amount that you qualify for and that is not a bad thing. You have to see it for what it is. It is an attempt by the banks to save their own butt by forcing you to buy well within your means. It is a good thing to keep you well within your budget. Please check with your Broker and Realtor and make sure that these changes will not affect your closing. Ask them what your back end debt to income is. It should be less than 43% in my eyes.

As always thank you for Reading.

Risk Assessment Tools: DU and LP Automated Underwriting Definitions

In today’s market, the need for an automated underwriting approval prior to submitting an offer has become common practice. To be competitive the Listing agent or the bank that owns the property would like to know that you have been ran through our automated underwriting engines. Yes, they are computer programs that assess the risk of the file and determine the viability of the loan. It is only as good as the inputter and that is why in most cases brokers and loan officers are asking that you provide a backpack of information. In continuing our trend of Mortgage Definition Monday I have defined these terms below:

Hud has defined Automated Underwriting in their terms and glossary section as follows.

Automated Underwriting - loan processing completed through a computer-based system that evaluates past credit history to determine if a loan should be approved. This system removes the possibility of personal bias against the buyer.

Additionally, I will add that the computer is assessing the total credit risk of the buyer. The loan can still be declined even if it receives an automated approval for multiple reasons. Some of which may include but are not limited to: unacceptable collateral, unacceptable income documentation, drop in the borrowers credit, unacceptable asset documentation and wholesaler overlays that would override the automated approval for the specific wholesaler.

Automated Underwriting Systems has been defined well on Mortgage Professor’s website.

This definition is as follows:

Automated Underwriting Systems -A particular computerized system for doing automated underwriting.  Mortgage insurers and some large lenders have developed such systems, but the most widely used are Fannie Mae’s “Desktop Underwriter” and Freddie Mac’s “Loan Prospector”.

I will add that the systems are very accurate however again each of the approvals will be reevaluated manually by an underwriter to determine the completeness of the documentation. The underwriting systems are constantly being tweaked to include the newest guidelines however it would be appropriate to double check prior to issuing an approval letter. DU Refi Plus is one of the new programs that took a minute before it was available in the system. When this is the case you make get feedback that is not consistent.

I will continue to bring Mortgage Definitions to you each and every Monday. Until then have a great week.

God Bless,

Matt Freeman

Definitions taken from the HUD glossary and Mortgage Professor glossary. I have added to these definitons and included links to their sites for further verifications.