by Rick Kent on 11.6.15 in Qualifying
DECEMBER 12, 2015
Fannie Mae will update its Automated Underwriting System(AUS) to implement changes to file requirements for delivery to the secondary market. Applications which have been reviewed using the current version of Fannie Mae’s AUS will continue to be processed under the previous lending guidelines, even if resubmitted through the AUS after 12/12/15. Some of the changes being made are listed below.
Currently when non-occupant co-borrowers are present on a Fannie Mae loan, the Occupant borrower must be reviewed for debt to income qualifications individually and must qualify using their own information with a debt to income ratio not exceeding 43%. This requirement is being removed and Fannie Mae will begin using “blended ratios” in the approval review. Blended Ratio is when all debts and all income from all borrowers (occupant and non-occupant) and lumped together in their respective category and then used to establish the overall debt ratio (total monthly debt obligations / total gross income = Debt Ratio).
The requirement of having to show the Occupant borrower qualifying with a debt ratio not exceeding 43% made the use of non-occupant co-borrowers very difficult on a Fannie Mae loan. The most reasonable solution to this issue was to use Freddie Mac as Freddie Mac uses blended ratio’s. The down side to this solution was that Freddie Mac required that the Occupant borrower contribute at least 5% of the purchase price towards the purchase of the property from their own sourced and seasoned funds (no Gift funds) when using non-occupant co-borrowers.
The maximum loan to value on loans using non-occupant co-borrowers will be limited to 95%. This limit may be exceeded when using a community second in connection with the standard Fannie Mae product.
HIGH BALANCE MORTGAGE LOANS
High Balance mortgage loans are mortgage loans with balances of $417,001 to $625,500. (California Loan Limit Tables) Current Fannie Mae policy would require the maximum loan to value not to exceed 90% (10% down payment required). Effective with the December updates, Fannie Mae will begin accepting loan files for high balance mortgages with loan to values up to 95%.
One of the largest challenges in buying a home in today’s market has proven to be the out of pocket expenses of completing the purchase of the home. While there are many possibilities to address how closing costs will be covered, down payment has been required to come from the borrower, gift funds from a family member of the borrower or possibly community second financing. Since most community second financing also comes with income restrictions for access to the community products, this can be difficult to obtain in a high cost area. The increased allowable loan to value ratio will be welcome relief for today’s home buyers.
Documentation requirements for Self-Employed borrowers is also being revisited by Fannie Mae. Traditionally, self-employed borrowers have been asked to provide the most recent two years personal and business tax returns along with a year to date profit and loss statement in order to establish their qualifying income. The tax returns would be reviewed to look for year over year declining income which may need further review. If earnings were consistent or increasing, the income was averaged over the two year period and the profit and loss statement was reviewed to make sure consistent earnings continued.
Effective with the December changes, Fannie Mae decisions may be returned requesting only the most recent years personal and business tax returns. What this means to the self-employed borrower is that they may receive the benefit of increased business earnings as the income will be reviewed over a 12 month period as opposed to being averaged over 24 months. The profit and loss statements will still be required to support the averaged earnings used for qualifying purposes.
HomeReady is Fannie Mae’s affordable lending product designed to help credit-worthy low to moderate income borrowers finance the purchase or refinance of their home. Some expanded flexibilities are available under the HomeReady product not available under other Fannie Mae loans.
As an affordable lending product, income restrictions may apply. Income restrictions will be based on the Area Median Income (AMI) amounts for the area in which the subject property is located. There is no income limit for properties located in a low-income census tract. Income limits of 100% of the AMI will apply to properties located in high-minority census tracts or designated disaster areas. Income limits of 80% of the AMI will apply to all other locations.
Additional Benefits of HomeReady
- 97% Loan to Value on purchase transactions with 105% Combined Loan to Value when using Community Seconds
- Non-Occupant Co-Borrower Allowed (Co-Borrower income does not affect AMI income limits)
- Reduced Mortgage Insurance Coverage (25% coverage for 90.01 – 97% LTV)
- No Borrower Required Minimum Contribution
- Flexibilities for “Cash on Hand” (1 unit properties only)
- Potential to use “Boarder” Income
- Potential to use “Non-Borrower” income as compensating factor for higher Debt to Income Ratios (Between 45.01% – 50%, must live with borrower)
- Standard Loan Level Pricing Adjustments waived with LTV’s greater than 80% and credit scores of 680 or higher. Loans outside these parameters have a loan level pricing adjustment cap of 1.5%.
Pre-Purchase Homeownership Education is preferred to be provided through Fannie Mae’s Approved provider – Framework. Fannie Mae will accept certificates of pre-purchase education/counseling from a HUD-approved counseling agency dated within 6 months of the application date and before September 30, 2016.