Are you ready for piles of paperwork?
Effective December 12, Fannie and Freddie are tightening lending guidelines again. While it has long been the rule that debt ratios for loans should not exceed 45% of gross income, this rule has been sometimes over-ridden by automated underwriting, sometimes permitting debt ratios of 50% and higher. These over-writes have not been arbitrary. Following are a few examples of when an over-write of this rule has made sense:
- The borrower has very significant cash reserves (far exceeding 6 months reserves)
- The monthly income level is high relative to the loan payment amount with little or no debt. An example might be a borrower who earns $10,000 per month. Even with a $5000 monthly payment, this borrower still has $5000 disposable income, justifying a 50% debt ratio. This same exception would not apply to someone with $2,000 a month income and only $1000 a month disposable income.
- A source of income, such as alimony or child support, is disallowed due to lack of a sufficient history of this income. This should not negate this income in computing the debt ratio - as in the case of a very recent divorce.
- A source of income, such as retirement income due to start in 3 months from the close of the loan is disallowed as income, but in reality will be incoming shortly after the loan closes.
Nevertheless, it appears that the 45% debt ratio will be strictly adhered to beginning December 12, 2009. For those loan applicants who fall into #3 and #4 above, you might have to wait a few months to apply for a mortgage.
Another rule change that all mortgage applicants need to pay attention to is that all borrowers can expect a re-pull of their credit report at some point during the loan process, and definitely prior to close of the loan.
Too often new home owners purchase large ticket items, such as appliances and furniture prior to the loan closing, which dramatically increases the debt ratio. IF an updated credit report shows an increased debt ratio, the loan application will have to go through a new underwriting process which could result in an approval being reversed.
Loan applicants must be diligent about making any and all monthly debt payments on time prior to the close of the loan - AND they should never incur new debt until after the loan has closed. Be careful of the amount of new debt you incur people. In most cases, first time home owners will be experiencing much higher debt loads than they are accustomed to with rent payments. There could be surprise home repair expenses as well, so additional debt is not a wise idea until you have adjusted to the increased monthly obligation.
On all future loan applications, after December 12, all credit reports must be no older than 30 days old at the time the loan application is submitted. In fact, many lenders have instituted this requirement already, so be prepared.
If you are shopping for a house now, do not run up any new debt after your original credit report is pulled by your lender. It could cause your pre-approval to become a loan decline.
In addition, effective January 1, 2010, there will be new RESPA guidelines in effect for all loan originators. While HUD has expressed a leniency for originators to wrap their arms around the new regulations, most lenders are announcing that no leniency will be allowed.
As a consumer, if you have received disclosures prior to January 1 showing you closing costs, etc, be prepared for updated paperwork after January 1 that comply with the new guidelines. The updated paperwork will not necessarily change any loan terms as you understand them. This is just meant to be a forewarning that lots of paperwork will be coming your way, and can be confusing.
Have a fabulous Thanksgiving holiday.
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