New underwriting guidelines coming June 25 may change your mortgage

New changes coming to Fannie Mae’s automated underwriting system June 25 could change the way you get a mortgage. Here’s how…

Fannie Mae has announced the way they look at credit is about to change for all loan applications dated June 25, 2016 or after. Lenders use Fannie Mae’s automated underwriting system (Desktop Underwriter) for every single mortgage loan sold in the secondary mortgage market. Fannie Mae’s underwriting system ensures delivery of that loan by reviewing the mortgage applicant’s credit history, credit score, debt to income, reserves (fancy term for savings), occupancy and issues a preliminary approval called “approve/eligible”. The new layer of credit change goes one step further by examining how you manage spending specifically, in the area of credit utilization.

Are you a Transactor or Revolver?  A Transactor is a borrower who pays off their credit card balances in full each month. A Revolver is a borrower who carries a balance and pays the minimum payment each month or regularly does balance transfers in an effort pay less interest on their debt.  Here is why if you are revolver your mortgage may be tougher to come by comes June 25, 2016. Fannie Mae is going to look at your ability to manage debt as another form of risk assessment in addition to your income, debt ratio, down payment and/or home-equity. The more revolving monthly obligations you carry the higher the likelihood you may have to pay off debt to qualify, purchase less house, or reduce the amount you’re looking to borrow

For example if you’re looking to buy home and you carry $300 per month in minimum credit card payment obligations, it will take $600 per month of income to offset the obligation of $300 per month so as the $300 per month credit card payment would have no negative bearing on your borrowing power. For the Transactor this is not a problem as they can demonstrate they pay their credit card off each month statement by providing a statement showing the obligation is indeed paid off. The revolver unable to show the obligation is paid has a strain on borrowing power to income.

If you are Transactor you’re in good shape for buying or refinancing a home by continuing to use your credit card to pay them off in full while supporting a high credit score as a result. If you are a Revolver you’re going to have some choices to make. These choices may include the following:

  • Can you buy less house?
  • Can you cash out refinance and payoff the obligations through closing?
  • Can you write a check to pay off the consumer obligations even if the interest rate on the consumer obligations of 0%? 0% credit obligations still limit your ability to qualify and will negatively count against your ability to qualify for a mortgage. The lender would classify this type of scenario as a Revolver.
  • Can you consolidate your obligations so you can save on the mortgage and take the monthly savings and prepay the consumer obligations?

If you have monthly ongoing credit accounts this is not to say you will not be able to get a mortgage, but it’s going to add another layer of credit scrutiny in the near future that’s going to play a role in your ability to buy a home or refinance one you already own. Simply put, more emphasis will be placed on the full credit, debt income and assets.

These changes are to promote fairness in the area of credit while helping to back grade a securities being delivered to Fannie Mae. If you need guidance as to which debts would have the most impact on your ability to qualify, talk to an experienced mortgage lender who can clearly articulate how your liabilities may affect your ability to borrow and more importantly solutions for maximizing your borrowing power.

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