Wednesday, May 12, 2010

Adjustable Rate Mortgages Will Soon be Harder to Get

Fannie Mae is changing the way they qualify borrowers who are getting adjustable rate mortgages (ARMs). For all ARMs with an initial fixed-rate period of five years or less that are submitted to underwriting on or after the weekend of June 19, 2010, lenders must use the greater of the note rate plus 2%, or the fully indexed rate to determine the debt-to-income ratio (DTI).

Here's an example. Assume a borrower is getting a 5-year ARM (fixed rate for the first 5 years and an adjustable rate after that). Let's say the note rate (the rate the borrower pays for the first 5 years) is 4%. Let's assume that the index is 3.5% and the margin is 2.25%.

The lender must calculate the note rate plus 2%. In this case it would be 4% + 2% = 6%.

The lender must also calculate the fully indexed rate, which is the index plus the margin. In this case it would be 3.5% + 2.25% = 5.75%.

The interest rate used to calculate the borrower's DTI is the greater of those two numbers. In our example, it would be 6%.

So even though the interest rate the borrower will pay for the first 5 years is only 4%, the borrower will be qualified for the loan as if the interest rate were 6%.

The reason for this change is to make sure borrowers don't run into trouble paying their mortgages when their interest rate increases after the 5-year fixed period.

No comments: