Thursday, September 24, 2009

Fannie Mae Lowers Its Maximum Debt-to-Income Ratio

This is something that will have incredibly far-reaching effects in the real estate industry.

Fannie Mae just announced that they are LOWERING the maximum debt-to-income ratio for all loans underwritten by their automated underwriting system to 45%, and to 50% for loan files that have strong compensating factors (very high credit scores, large cash reserves, etc.). Currently, there is no limit to the maximum debt-to-income ratio when the automated underwriting system is used. We routinely see loans get approved with ratios in the 60% range.

Fannie Mae is also adopting a new standard for credit scores for loans run through the automated underwriting system. Anything less than 620 will now be denied. The old minimum was 580 if the borrower had compensating factors (big down payment, low debt-to-income ratio, etc.). For loans that are not run through the automated system, the minimum credit score is 660.

There is a good argument for these new guidelines because many of the loans that are being approved recently are going into foreclosure (just because a house is cheap does not mean the buyer can afford it).

It is more important than ever to make sure your mortgage broker is using the automated underwriting system, that they know how to help someone raise their credit score (paying off old collection accounts and closing active accounts will lower a score, by the way), and that they know how to structure a loan correctly. Conventional loans that were approved in the past will not get approved going forward, and you need to make sure your deal has the best possible chance of getting approved.

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