Fannie Mae Tightens Its Belt On Adjustable Rate (ARM) and Interest Only Mortgage Programs

by Rich Vetstein on May 12, 2010 · 0 comments

in Fannie Mae, Massachusetts Real Estate Law, Mortgages

We are thrilled to have Sheira MacKenzie, a Certified Mortgage Planner with Fairway Mortgage in Needham, MA, who is here to guest blog about the new, tighter Fannie Mae lending underwriting guidelines on adjustable rate and interest-only loan programs. You can contact Sheira at 781-719-4673 or by email sheiram@fairwaymc.com. Her website is www.sheiramackenzie.com.

Overview Of Changes

Sheira MacKenzie, Fairway Mortgage

For the first time this year, Fannie Mae announced significant updates to its mortgage underwriting guidelines. The changes include strict new ARM qualification standards, the elimination of a once-popular 7 year balloon loan product, and tighter rules for interest only mortgages.

Fannie Mae made its official announcement on April 30, 2010.  The changes will roll out over the next 12 weeks.

These changes are intended to ensure that shaky borrowers can afford an adjustable rate mortgage not only during the first fixed term, but once the rate adjusts even higher.

Borrowers Need More Affordability Muscle For Their ARMs

The first guideline change is tied to ARMs of 5 years or less. This is a huge change which will really impact the ARM market. Mortgage applicants must now qualify based on a mortgage rate 2% higher than their note rate. For example, if your mortgage rate is 5%, for qualification purposes, you must be able to afford a 7% interest rate. The elevated qualification payment will disqualify borrowers whose debt-to-income levels are borderline.

Adjustable Rate Mortgages are still a great product… for the right consumer. Today, it is critical to have a team of experts to help borrowers to determine the right loan strategy for their needs. In Massachusetts, we see slightly higher incomes, but consumers need to be aware of their overall monthly obligations prior to applying for a loan. Take your gross monthly income and multiply it by 35%. If your new housing payment (including taxes, insurance, or condo fee) plus your car, credit, and other loan payments is higher than that number, you could be over-extending yourself in the eyes of investors today. Get introduced to a seasoned mortgage expert who can review your credit and monthly obligations with you, and be sure to check with your financial planner prior to embarking on the approval process. Together you can determine if you are best suited for an ARM or fixed rate as well as the best loan strategy for your short and long-term goals.

Pop Goes The 7 Year Balloon Program

The second change is Fannie Mae’s elimination of the standard 7-year balloon mortgage.  Balloon mortgages were popular early last decade.  Lately, few borrowers have chosen them, though.  Mostly because rates have been relative high as compared to a comparable 7-year ARM.

Interest-Only Belt Tightening

Lastly, Fannie Mae is changing its interest only mortgages guidelines. Effective June 19, 2010, Fannie Mae interest only mortgages must meet the following criteria:

  1. The home must be a 1-unit property
  2. The home must be a primary residence, or vacation home
  3. The borrower’s FICO must be 720 or higher
  4. The mortgage must be a purchase, or rate-and-term refinance. No “cash out” allowed.

Furthermore, borrowers using interest only mortgages must show two full years of mortgage payments “in the bank” at the time of closing. Earlier this year, Fannie Mae’s sister, Freddie Mac, announced that as of September 2010, it will stop offering interest only loans altogether.

Between Fannie Mae, Freddie Mac, the FHA, and other government-supported entities, the U.S. government now backs 96.5% of the U.S. mortgage market. So long as mortgage default rates are high, expect approvals for all borrower types to continue to toughen.

Great post Sheira! We welcome you to the ever-increasing stable of guest bloggers on the Massachusetts Real Estate Law Blog. And we can attest from working with Sheira that she is truly a highly experienced, trusted professional, whom any buyer would be fortunate to have on their team.

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