Effective July 29, 2017, Fannie Mae will release DU Version 10.1, packed full to changes to their underwriting guidelines. These changes apply to Fannie Mae conforming mortgages (Freddie Mac has different guidelines). Here are some of updates effective at the end of this month:
50% Debt-to-Income Ratios. Probably the biggest game changer with the update is the expanded debt to income ratios. Typically, Fannie Mae has had a 45% maximum debt-to-income. With the release of 10.1, Fannie Mae will now allow up to 50% for a debt to income ratio. That means that 50% of a persons gross monthly income can go towards the new total proposed mortgage payment and monthly debts. For example, if your gross monthly income is $5,000 (this is before taxes, insurance, health care, 401k or any other deductions are taken from your paycheck), currently the most your total debts AND new proposed mortgage payment aka PITI (including taxes, insurance, pmi and any HOA dues) could be is $2,250 ($5,000 x 45%). So if you have $500 in monthly debts, your max mortgage payment (PITI) would be $1,750. With the new guideline at 50%, the same borrower would qualify for a payment up to $2,000 ($5000 x 50% = $2500 less $500 monthly debts).
Reduced Documentation for Self-Employed Borrowers. Great news for self-employed or commission paid borrowers, Fannie Mae will start allowing just one year of tax returns instead of two years. This will be interesting to see how lenders treat this and if they have overlays. Underwriters (the human type) really like having two years of returns to show income trends. I’m anticipating more information to be rolled out regarding this.
New Employment. With 10.1, if a borrower has a contract to start a new job and will not be at the new job prior to closing, Fannie Mae may accept this scenario. Fannie Mae’s underwriting system will dictate what is required from the borrower for loan approval. This is currently for primary residence, one unit, purchase transactions only.
Disputed Tradelines on Credit Reports. Currently most borrowers need to remove “disputes” from their credit report before financing can be provided. With 10.1, some borrowers may not have to remove disputes depending on what the automated underwriting (DU aka Desktop Underwriter) response is from Fannie Mae. If for whatever reasons, Fannie Mae’s DU decides it’s not happy with the disputes on the credit report, some borrowers may still be in the same boat as having to deal with removing the disputes.
Higher Loan-to-Values allowed with Adjustable Rate Mortgages. 10.1 will allow for higher loan to values for adjustable rate mortgages (ARMs). ARMs will now have the same LTV limits as a “fixed rate” mortgage.
This is just a quick overview of the changes that will be taking place effective July 29, 2017. If you’re considering buying or refinancing a home anywhere in Washington state, I’m happy to help you! Click here for a no-hassle mortgage rate quote.
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