You know those furniture store signs “Out for your business”? Well, Fannie Mae is out for your business! This year there has been a consistent flow of updates coming from Fannie Mae. Plus there are more coming! Most of these include loosening of income, asset, and credit guidelines. So this means more buyers should qualify compared to prior years. In addition to Fannie Mae making these changes, our team makes it a point to stay on top of these guidelines. Therefore we can help more buyers purchase a primary, secondary, or investment home. These flexible guidelines help buyers with…
Higher debt ratios allowed up to 50%
Co signors added to help qualification
Use lower student loan payments
Low down payment
Reduced monthly payments through reduced PMI rates
Higher loan size limits
Easier self employed qualifying
Fannie Mae Increases Debt Ratio Allowed
One of the biggest roadblocks to homeownership is a borrower’s debt ratio being too high. Traditionally debt ratios max out at 45% of a borrower’s qualifying income. Although stronger files, it was “possible” to get approvals up to 50% on conventional loans. But effective July 29, 2017, Desktop Underwriter, Fannie Mae’s automated preapproval system will allow up to a 50% debt ratio. Instead of needing compensating factors for this level ratio, Fannie will look at 50% as more of the norm. Therefore, more borrowers will qualify.
What if the Debt Ratio is Still Too High?
So what if a buyer still has a debt ratio over 50%? That is where we will put on our thinking caps and dig down hard to find solutions. Not every situation can work out, but we explore all possible options to help borrowers qualify. There are several ways we accomplish this. First we will look for nontaxable income which could be “grossed up” to a higher amount. Using a higher income will lower a debt ratio.
Another option could be to review other loan products that could allow for a higher debt ratio. FHA & VA could allow a 55% or possible little higher ratio for instance. What if a debt is paid by another directly to the creditor? That could help with documentation.
Fannie Mae Allows Co Signors to Help Buyers Qualify
So if a borrower cannot get under the 50% ratio requirement, then there is another great Fannie solution. A co signor on the loan could help lower a debt ratio. Check out our article explaining “How a Mortgage Co signor May Help You Qualify for a First Home“. Also, a great benefit is a co signor doesn’t have to live in the home! This could even come in handy for split families. This is a case where one spouse would live in the home where the other spouse may need to stay behind because of a job. FHA loans also allow these non occupying co borrowers in case FHA is the better option.
Fannie Mae Income Based Repayment Student Loan Guidelines
Average student loan debt for 2015 graduates in North Carolina is $25,645 according the Federal Reserve. But often debts will far exceed this. Well, lately lending agencies have started relaxing guidelines in regards to student loan payments. Conventional Fannie loans are the latest to come up with flexible qualifications when it comes to IBR student loan payments. When buyers have student loan debts in IBR status, we highly suggest checking out this article on how “Student Loan Mortgage Guidelines Help More Buyers“.
HomeReady Solves Down Payment Issue
Besides credit and debt ratio issues, down payment is typically one of the top 3 hurdles to homeownership. Let’s say a buyer or property doesn’t qualify for VA or USDA no money down loans. So a great option is the Fannie HomeReady option. It provides lower monthly payments, 3% down payment that can be a gift, and flexible credit guidelines. To learn the details, check out our article, “HomeReady Loans Offer Affordability to Buyers“.
Years ago, buyers had to put down 20% on a conventional loan. Then, PMI solved that issue and allowed for buyers to purchase with as little as 3% down. Although PMI usually gets a bad rap as only benefitting the lender, it is actually very helpful for buyers. Again, it allows for a buyer to put down a smaller amount. As of this article, PMI is still a tax deduction for a primary residence and certain income limits. For Fannie Mae loans financing over 80%, there are several PMI options and click on each for a detailed article.
- Borrower paid monthly PMI
- Borrower paid single premium PMI
- Lender paid single premium PMI
- Lender paid PMI
An advantage that conventional loan PMI has over USDA and most FHA loans is that the PMI may stop. See one of our most popular articles, “When does PMI stop on FHA, USDA, and conventional loans“.
For the first time since 2006, conventional loan size limits increased from $417,000. The conforming loan limit for most areas in the contiguous states increased to $424,100 for a single family home. Additionally, there are some higher cost areas which allow for high balance conforming loans. These areas allow for single family loans to go up to $636,150. This may not seem like a lot, but for some buyers this helps avoid higher down payments of jumbo loans. Learn more details of this limit increase here. But also VA loans go by these limits, so it really helps Veterans financing up to 100% to these amounts. Yes, no money down possibly for VA loans to these amounts!
Fannie Mae Simplifies Self Employed Documentation
Self employed business owners, especially newer businesses, often have a tough time with income documentation. Traditionally, lenders average the last 2 years of tax returns to determine a qualifying income. Also beginning July 29 2017, Fannie’s Desktop Underwriter states it will simplify IRS tax return documentation for many borrowers. DU is supposed to increase the number of borrowers eligible for the one year of personal and business tax returns documentation. Freddie Mac conventional loans already provide right many loan approvals with just one year of tax returns. Together, these will help a lot of business owners qualify easier. Check out a few of our helpful self employed articles:
- Self employed mortgage loans are more obtainable than you think!
- Self employed home documentation to gather & questions asked at application
- Tax return issues that can cause delays or denials when buying a home
Over the years, there has been much press over the over documentation and the overly strict guidelines in mortgage loans. But, recent loosening of guidelines, a low rate environment, and still responsible lending should create more homeownership opportunities for many. Reach out to our team to discuss how a Fannie conventional loan or others could help you affordably own a home.
Author: Russell Smith
Team Move OVM Financial loan officer success is Russell’s primary focus. He provides the tools and techniques he used as a top producing loan officer. Additionally he offers the Team Move OVM Financial Agent Training Program. Sharing is so important to Russell so he works diligently to be a resource to loan originators and Realtors.