Monday, June 28, 2010

Fannie Mae Adds 2 Years to the Foreclosure Waiting Period

Effective for all loan applications dated October 1, 2010 and later, Fannie Mae is increasing the waiting period before someone can get a mortgage after a foreclosure.

The current waiting period is 5 years, provided the borrower makes a larger than normal down payment, and 7 years if the borrower makes a normal down payment. The 5 year option is being discontinued and the new waiting period will be increasing to 7 years.

If the borrower can document extenuating circumstances, they will be able to buy a house with a Fannie Mae loan after 3 years, but they will need a minimum down payment of 10% and they can only buy a principal residence. They will need to wait the full 7 years to buy a second home or a rental property.

Here is how Fannie Mae defines "extenuating circumstances":

Extenuating circumstances are nonrecurring events that are beyond the borrower’s control that result in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations.

If a borrower claims that derogatory information is the result of extenuating circumstances, the lender must substantiate the borrower’s claim. Examples of documentation that can be used to support extenuating circumstances include documents that confirm the event (such as a copy of a divorce decree, medical reports or bills, notice of job layoff, job severance papers, etc.) and documents that illustrate factors that contributed to the borrower’s inability to resolve the problems that resulted from the event (such as a copy of insurance papers or claim settlements, property listing agreements, lease agreements, tax returns covering the periods prior to, during, and after a loss of employment, etc.).

The lender must obtain a letter from the borrower explaining the relevance of the documentation. The letter must support the claims of extenuating circumstances, confirm the nature of the event that led to the bankruptcy or foreclosure-related action, and illustrate the borrower had no reasonable options other than to default on their financial obligations.

This new guideline only applies to Fannie Mae loans. FHA and VA loans have shorter waiting periods after a foreclosure.

Wednesday, June 23, 2010

Second Credit Report May Delay Closings

The new Fannie Mae rules for credit have officially taken effect. They WILL change the way you do business.

These new rules affect all conforming (non-government) loans that are sold to Fannie Mae.

Here's what you need to know:

-- Shortly before the closing, the borrower's credit report must be "refreshed". A refreshed credit report shows the borrower's accounts, the balances, the minimum monthly payments, and the number of credit inquiries (the number of times the borrower has applied for credit).
-- If the borrower's total minimum payments increase enough to make the debt-to-income (DTI) ratio 2% higher than it was using the original credit report, the loan must go back to underwriting!
-- If there are any new credit inquiries, the loan must go back to underwriting!
-- Example #1: A borrower makes $5,000 gross income per month. If their payments go up by $100 or more on the refreshed report (2% of $5,000, enough to raise the DTI ratio by 2%), then the loan must be underwritten again.
-- Example #2: After the lender pulls the initial credit report, the borrower applies for a new account, or applies for an increase in the credit limit on an existing account. This will result in a new credit inquiry on the refreshed report and the loan must be underwritten again.

There is a very big chance that the loan will not close on time if it has to be underwritten again 3 days before the closing. The loan will still close (provided the borrower still qualifies), but the closing will probably be delayed.

If you are a real estate agent, here's what you need to do to minimize the impact of this new Fannie Mae rule:

-- Make sure you are using a lender who knows about the new credit rules, and make sure they are telling your buyers about it. No good lender will mind if you ask, so ask.
-- Write your contracts so the loan conditions deadline is as close to the closing date as possible - within a day or two. If the loan gets delayed because it has to go back to underwriting, your buyer is risking their earnest money. The loan conditions deadline does not have anything to do with the loan being approved. It is the last date that the buyer can get their earnest money back by objecting to the loan conditions. That means the buyer can get their money back if they say they don't like the interest rate or anything else about the loan. If you think the loan conditions deadline has something to do with the loan being approved, read the contract again to learn what it really means.
-- Repeatedly ask your buyers if they are using their credit cards or applying for new credit. If the answer is yes, you may have a problem.
-- Do not assume that these new rules will simply go away because they make life tough for lenders, real estate agents, buyers, and sellers. The intent of the new rules is to eliminate foreclosures, and they will go a long way towards doing that. These rules are probably here to stay for a very long time. Everyone needs to accept the new reality of the mortgage industry. The government is forcing us all to think strategically (long-term). Most of us only think about the short-term, and that way of thinking has resulted in the current economic mess, so they are forcing us to act differently.

The new rules are for all Fannie Mae loans. It does not matter which lender is used. If the loan is going to be sold to Fannie Mae, the lender must follow the rules. At the moment, the new rules do not apply to FHA or VA loans, but that doesn't mean FHA and VA will never adopt similar rules.

Monday, June 14, 2010

Have $50,000 in Credit Card Debt? - Can You Get a Mortgage?

People are always asking us if they can get a mortgage with $30,000, $40,000, $50,000 or more in credit card debt. The short answer is that it doesn't really matter how much your total debt is. The debt-to-income ratio (DTI) used to determine whether you qualify for a loan is based on the minimum monthly payments that show on your credit report, NOT on the total balance due.

To calculate your DTI, take the minimum monthly payments that show on your credit report, add your monthly housing payment to that amount, and then divide the total by your monthly gross income (income before taxes).

If you owe $1,000 in minimum monthly payments each month, and your housing payment is going to be $1,500 per month, then your total payments each month will be $2,500. Divide that $2,500 by your monthly gross income to get your DTI. If you make $5,000 a month, your DTI would be 50%. If you make $6,000 a month, then your DTI would be 41.6%.

The total debt amount does not matter. Only the monthly payments count.

How high a DTI can you have and still qualify? That depends on your credit score and the type of loan you are getting. It is common to get loans approved in the 50%-55% range if you have very good credit (above 740).

Thursday, June 3, 2010

New Fannie Mae Rules Will Kill Your Real Estate Deals if You Ignore Them!

For all conventional loan applications dated on or after June 1, 2010, Fannie Mae has instituted some new rules as part of their Loan Quality Initiative. They are not fooling around this time. Their goal is clear: to reduce loan fraud and the number of foreclosures. There are many new changes, but here is the main thing that WILL cause a deal to STOP!

Lenders must ensure that borrowers have not taken on any additional debt between the date of loan application and the date of closing. If a lender does not follow the new rules, Fannie Mae will refuse to buy the loan from them. To remain compliant, Fannie Mae suggests that lenders do the following:

• Refresh the borrower’s credit report just prior to closing in order to uncover additional debt or credit inquiries.
• If the borrower has new debt that was not included on the loan application, the additional debt must be considered in qualifying the borrower.
• Credit inquiries must be researched to determine whether the borrower has obtained additional debt that is not yet shown on the credit report.

It is no longer an acceptable practice to “suggest” to borrowers that they refrain from taking on additional debt before the closing. New debt will, at the very least, delay the closing. If the new debt pushes the borrowers outside of the qualifying debt-to-income ratio for the loan, then the deal will die.

None of this is bad. In fact, it’s very good. The financial mess we’re in at the moment was caused by Wall Street greed (inventing loan products that were intended to rip-off borrowers), by lender greed (selling the loans), by real estate agent greed (directing borrowers to lenders who would cheat to close a loan), by title company greed (ignoring the unethical business practices of lenders and agents in order to maintain their flow of business), by appraiser greed (falsifying appraisals), and by borrower greed (lying to get their dream house).

Although some are innocent, many are not. Now we all get to pay for the sins of the guilty.

The best way to handle a situation like this is to spend your energy on learning the rules and learning how to operate in the new environment. It is not going to go away. The only way to stop the bailouts and the regulation and the recession is to stop cheating. A free market society is a great thing until it gets out of control, and it is clearly out of control. The rules are now tightening, the crooks are being driven from the business (at a very slow pace), and the people who have accepted the new reality are thriving. The pie is definitely getting smaller, but for the people who understand that things are not going to magically return to sub-prime heaven, their piece of the pie has gotten bigger.

Tuesday, June 1, 2010

What are Loan Buybacks and Why Do You Need to Know About Them?

When a borrower stops making payments on a loan, Fannie Mae, Freddie Mac, and Ginnie Mae – the government sponsored enterprises that purchase mortgages from lenders after the loans close – review the loan to make sure that the lender underwrote the loan according to the published guidelines. In other words, they audit the loan file to make sure the lender followed the rules.

If the lender didn’t follow the rules, then Fannie Mae, Freddie Mac, and Ginnie Mae can force the lender to buy the loan back from them. If that happens, the lender is stuck with a loan that no one is paying.

Lenders don’t want to be stuck with loans that no one is paying, so they have recently begun to enforce the rules, meaning they now follow the underwriting guidelines very carefully. In the past, underwriters had a great deal of discretion when they underwrote a loan. Now they do not.

Fannie, Freddie, and Ginnie are making lenders buy back loans so the flood of foreclosures will stop. That is certainly a good thing, but borrowers and real estate agents need to be aware that loans are now being underwritten much more carefully than they were even a few weeks ago.

As long as a borrower meets all the underwriting guidelines, their loan will still be approved. However, underwriters are requiring much more documentation than ever before because they have to be able to prove they did their job correctly if the loan goes into default. That means it sometimes takes longer to get a final approval for a loan.

It’s hard to find fault with someone who is doing their job a bit more carefully in order to hang onto their job, so underwriters really shouldn’t be cast as the enemy. They still get paid to approve loans, not to deny them.

If everyone is aware that a loan might take an extra week or so to be approved, everything generally goes pretty smoothly.