Everyone is aware of how difficult it has become to purchase a home as the current guidelines have continued to become stricter. Compared to years ago, when just about anyone could obtain a mortgage, today's atmosphere is quite different. Fannie Mae has recently announced changes that will go into effect that are both good and bad for potential borrowers.
Fannie Mae, a government sponsored entity (Freddie Mac is also a government sponsored entity) is responsible for conventional conforming mortgages. They issued guidelines to lenders for mortgage approval that are purchase by their organization. Lenders are also allowed to issue further guidelines which their customers must meet in order to receive mortgage approval. This means that just because Fannie Mae has a guideline, the lender does not have to follow as Fannie Mae sets minimum guidelines.
The good news is that Fannie Mae will now accept gifts or grants up to 5% that can be used towards the down payment on a home. Up until now, most borrowers turned to FHA (Federal Housing Administration) for lending in order to use these additional funds. Almost every state offers grants, second mortgages and bonds at no or very little cost to the borrower for use in the home buying transaction. If a borrowers has good credit and can be approved through Fannie Mae, they will now be able to use these, in additional to gifts, towards their final transaction. The down side is that lenders do not have to accept the gifts or grants, so it is important to shop around to see what lenders are going along with this latest update by Fannie Mae. Most community housing agencies usually know what lenders are accepting their terms.
The bad news in Fannie Mae's latest update is that they have updated their qualifying ratios for approval. The current debt to income ratio was 55% and is now going to be 45%. This means that total debt of a borrower cannot exceed 45% of their income in order to be approved for a Fannie Mae conventional conforming loan. This is not a major impact since most lenders already use the 45% ratio in order to approve a mortgage.
Having more of an impact to approval is the way debt is calculated. Debt for less than 10 payments left on a revolve, installment or other credit bill used to be eliminated from debt ratios. This will no longer happen. All debt will be used to calculate debt to income making it more difficult for approval.
So that's the latest information about changes to approval guidelines coming effective mid December, 2010. The mortgage business continues to evolve and change, sometimes for the better and sometimes for the worse.