Sunday, December 13, 2009

New Credit and Debt-to-Income Ratio Rules

Fannie Mae is making some very important changes to their underwriting guidelines, effective this weekend (December 12, 2009). Here's what everyone in the real estate and mortgage industries needs to know, and here's how to plan for the changes:

-- The lowest credit score acceptable to Fannie Mae (except for the government refinance bailout loans) is now 620.
-- The maximum debt-to-income ratio for Fannie Mae loans is now 45%, with a possible increase to 50% for borrowers with "strong compensating factors".
-- The debt-to-income ratio (DTI) is calculated like this: add up the monthly principal, interest, taxes, homeowner's insurance, mortgage insurance, HOA dues, and the minimum monthly payments for all debts that show on the credit report. Then divide that number by the borrower's monthly gross income (income before taxes).
-- Strong compensating factors include very high credit scores, very high residual income (income after all payments are made), very large assets, etc. These factors are analyzed by the Fannie Mae software, not by a human underwriter. If the software says they are strong enough to increase the DTI to 50%, then that's OK. An underwriter cannot override the software and increase the allowable DTI.

These new rules will definitely have an impact on the number of people who will be able to qualify for a mortgage, but being aware of the new rules can also help your business tremendously if you know how to capitalize on them. There is no way around these new guidelines, so you need to know what they are and how to deal with the changes.

Here's how you can very easily use the underwriting changes that take effect this weekend to your advantage:

-- Insist that your lender use the Fannie Mae pre-approval software before issuing a pre-approval. If your lender doesn't use it, then you don't have a legitimate pre-approval. Only a very few agents ever ask us if we have run their buyer's loan through the software to get a real pre-approval. We always do, but many lenders do not. Any lender who uses the software will be more than happy to tell you that they use it because it sets them apart from their competition. If you only use lenders who issue legitimate pre-approvals, then you will also set yourself apart from your competition.
-- Find a lender who knows about credit scoring. There is FREE software that lenders can use that will tell someone exactly what they need to do to raise their credit scores. They do NOT need to pay hundreds or thousands of dollars to a "credit repair" company. It can all be done for FREE. Insist that your lender use this free software. We have an ongoing pipeline of borrowers who are taking the advice we give them and eventually buy homes (typically 1-6 months after they contact us for credit advice). These borrowers are incredibly loyal to us and to the real estate agents who referred them to us. Referring people to companies that charge hundreds or thousands of dollars to improve their credit does not make for very loyal clients. Excellent free advice = loyal clients = $$$.

Set yourself apart from your competition by only using lenders who offer excellent free advice.

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