Fannie Mae Tightens Guidelines On ARMs And Interest Only Products
For the first time this year, Fannie Mae announced significant updates to its mortgage underwriting guidelines.
The changes include newer, harsher ARM qualification standards, the elimination of a once-popular loan product, and tighter rules for interest only mortgages.
Fannie Mae made its official announcement April 30, 2010. The changes will roll out to home buyers and homeowners over the next 12 weeks.
The first guideline change is tied to ARMs of 5 years or less.
Mortgage applicants must now qualify based on a mortgage rate 2% higher than their note rate. For example, if your mortgage rate is 5 percent, for qualification purposes, your rate would be 7 percent.
The elevated qualification payment will disqualify borrowers whose debt-to-income levels are borderline.
The second change is Fannie Mae’s elimination of the standard 7-year balloon mortgage. Balloon mortgages were popular early last decade. Lately, few borrowers have chosen them, though. Mostly because rates have been relative high as compared to a comparable 7-year ARM.
And, lastly, Fannie Mae is changing its interest only mortgages guidelines.
Effective June 19, 2010, Fannie Mae interest only mortgages must meet the following criteria:
- The home must be a 1-unit property
- The home must be a primary residence, or vacation home
- The borrower’s FICO must be 720 or higher
- The mortgage must be a purchase, or rate-and-term refinance. No “cash out” allowed.
Furthermore, borrowers using interest only mortgages must show two full years of mortgage payments “in the bank” at the time of closing.
Earlier this year, Fannie Mae-sister Freddie Mac announced that as of September 2010, it will stop offering interest only loans altogether.
Between Fannie Mae, Freddie Mac, the FHA, and other government-supported entities, the U.S. government now backs 96.5% of the U.S. mortgage market. So long as mortgage default rates are high, expect approvals for all borrower types to continue to toughen.
Related posts:
- Fannie Mae Passes New, Tougher Mortgage Guidelines
- Fannie Mae Guidelines Change Monday. Apply Today To Lock In To “Old” Rules.
- Loan Application Alert : Conforming, Interest Only Mortgages Guidelines Change Next Week
Michael Haigh has 20+ years of professional experience in the banking and mortgage industry. He has the knowledge, education, and dedication to get you the best loan for your situation, answer your questions honestly and completely, and make your mortgaging experience a pleasure. His reputation includes being the number one lender in the country for CitiBank for 9 years, then at Chase for 1 year and now with WJ Bradley since August of 2009. This is because of the quantity of loans, myriad of people he's helped, and his dedication to helping his clients find the perfect loan for them.
