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How New Rules Can Affect Your Mortgage Approval 2017-01-21T11:33:15-08:00

How new Fannie Mae rules can affect your mortgage approval

by Shawn Carvin, Senior Mortgage Banker

Since the housing crisis of 2008, mortgage lenders have gotten stricter with their approval policies, and new Fannie Mae rules that go into effect on June 25, 2016 may make it even more difficult to get a mortgage.

Owning a home has long been considered part of the American dream. And since most of us don’t live in a world that allows us to just pick a plot of land, get some wood and tools, and build a home like our ancestors did, fulfilling the dream of home ownership requires us to put ourselves at the mercy of financial institutions like Fannie Mae.

New Fannie Mae rules incorporate trended credit data

new fannie mae rules mortgage approval - torrance home loansOne of the key changes in the new Fannie Mae rules involves the use of “trended” credit data. Credit reports and credit scoring used in mortgage underwriting have traditionally looked at the number and types of credit accounts a person has open, any delinquent accounts or late payments, and the total amount of credit available compared with the current amount of debt being carried – referred to as credit utilization.

The rule of thumb until now has been that if a mortgage applicant’s credit utilization is well below 20%, they will generally qualify for the best available rates, as long as all other factors are also favorable.

But with this change, mortgage underwriters will now consider not just whether an applicant pays on time and how much credit they are currently using. They will also see the running balance, the minimum required payment, and the actual payment the applicant made for the last 24 months on each of their credit cards.

This means that someone who frequently carries a credit card balance and only pays the minimum amount due every month would be considered a higher-risk borrower than someone who regularly pays off most or all of their credit card balances every month.

Until now, it was a common practice for prospective borrowers to get themselves ready to apply for a mortgage by paying down any high credit card balances a few months prior to applying for a mortgage. But going forward, the look back period is a full two years, which means anyone hoping to buy a house within the next few years should manage their credit card accounts accordingly.

Some good news: trended credit card data will not impact FHA or VA loans underwritten by Fannie Mae – at least for now.

New Fannie Mae rules may be bad news for the self-employed

Another major change is that self-employment is now considered a risk factor under the new guidelines. Because self-employment income tends to fluctuate from year to year, Fannie Mae considers self-employed borrowers to be at a higher risk of default, even if they consistently pay their bills on time and have a good credit history.

This change comes into play if one or both borrowers on the loan derive the majority of their income from self-employment. However, in a household where one borrower is self-employed and the other is traditionally employed, self-employment will not be considered a risk factor.

Leveling the playing field for first-time home buyers

Previously, borrowers with no mortgage history – those who have never taken out a home loan – were viewed as higher risk than those who previously had mortgages.

Since having no mortgage history is not considered a greater risk factor under the new Fannie Mae rules, it may be easier for some first-time home buyers to take out a new home loan, provided they have a good credit history with few or no delinquencies.

New Fannie Mae rules are a ray of hope for people who need second chances

Mortgage delinquencies were considered a higher risk than other types of delinquencies under the old guidelines, but under the new rules, all types of debt will be evaluated equally. As such, a borrower who got behind on a previous or current mortgage but has had an otherwise flawless credit history since then may now have a better chance of being approved.

Are you concerned whether changes in mortgage qualification requirements, including new Fannie Mae rules, could impact your ability to purchase a home in the near future? Contact Torrance Mortgage Lender Shawn Carvin today to discuss mortgage qualification strategies for your unique situation. Shawn is a licensed California mortgage professional with nearly 30 years experience in the financial services industry, half of that focused on mortgage lending. Shawn works with clients throughout the greater Los Angeles area including Torrance, the Palos Verdes Peninsula, the Beach Cities, other South Bay communities, and beyond.