Updated Oct 1st 2012 11:25AM
One of the nation's two large government-sponsored backers of home loans recently revealed that it would tighten some of its lending restrictions for certain consumers.
The company announced that it would change the requirements for both new borrowers and those who are refinancing existing home loans. Now the maximum loan-to-value ratios that it will allow is just 90 percent, down from as much as 97 percent in the past, and certain loans will require higher credit scores to be backed by the government-sponsored mortgage giant, based on Fannie Mae data compiled by Bloomberg Businessweek.
In particular, the tighter mortgage requirements mandate that borrowers of adjustable-rate loans. who were not cleared by the company's Desktop Underwriter software program, will need credit ratings of 640, up from the current 620, the report said. Further, lenders will no longer be able to grant loans for those whose ratings are 40 points below other requirements based on their judgment of other factors.
And on top of everything else, an expert noted that the company will also likely begin asking self-employed borrowers for more tax information in the future, the report said. Now, Fannie Mae will need to see two years of tax returns for both them and their businesses to verify their income. This change may be related to a software update the company applied to its underwriting program.
Undermining the Market?
"This can knock a decent portion of borrowers out of the picture who had a rough year in business two years ago," Matt Hackett, underwriting manager at New York lender Equity Now Inc. told the news agency. "You'd be surprised how much of an effect this has."
Fannie Mae and Freddie Mac, both of which are now run by the federal government, back about two-thirds of all new home loans, the report said. Experts believe these tighter restrictions will be significantly problematic to the housing market.
The real estate industry is still largely in recovery mode after the crash observed a few years ago, though there have been some improvements in recent months. Currently, housing affordability is at or near all-time highs thanks to low interest rates and prices, though prices are expected to rise over the remaining few months of the year.
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On paper it seems like the perfect time to refinance. But wade into the mortgage market, and you may quickly feel as if you're trying to grab a dollar in a game-show booth where the money is blowing around: Those ultralow rates are right in front of you, yet maddeningly elusive.
Lenders, grappling with deadbeat homeowners and shifting regulations, have pared back on mortgage products and upped credit requirements. Still, you have a good incentive to try: If you took out a mortgage two years ago, when rates were in the mid-sixes, you stand to drop your rate nearly two percentage points, saving almost $300 a month on a $300,000 loan. Here's how to navigate the roadblocks.
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Nowadays, credit score and equity are king. To land the best rates, you'll probably need a credit score of at least 740, and 20 percent equity. "Banks are looking for reasons not to lend you money," says Mark Miskiel of Lighthouse Mortgage in Sedona, Ariz.
If you don't have 20% equity, a refi isn't out of the question -- President Obama's housing package allows homeowners who owe as much as 105% to receive government-backed loans. To qualify for that program, however, your original mortgage must be held by one of the government-sponsored entities, Freddie Mac or Fannie Mae; you must prove that you can keep up with payments; and you'll get stuck with fees that tack 0.25% to 3% onto your rate.
Home-equity loans and lines have become the enemy of would-be refinancers. Before you can close on a new loan, your home-equity lender must agree to "subordinate" the secondary loan (meaning that your primary lender will get repaid first in the event you run into financial trouble). That can take at least a month, says Bob Moulton of the Americana Mortgage Group in Manhasset, N.Y.
One way to speed up the process is to do a consolidation refi through your home-equity lender. If that's not possible, aim to submit the subordination paperwork as you start shopping for a primary mortgage. And know that other lenders may add up to 0.25 percent to your rate to cash out the secondary loan.
No matter how stellar your credit, you won't get a great rate without doing some serious shopping. That's because every bank is using different standards for underwriting loans, so while you may look like a risky borrower to one, another may welcome you with open arms. In general, says Keith Gumbinger of mortgage data firm HSH Associates, you're likely to get the best rates from small local banks and credit unions.
Unfortunately, if you need a jumbo loan (typically $417,000, but it can go up to $729,750 in high-cost areas), you can kiss those super-low rates goodbye. While jumbos normally run about half a percentage point higher than smaller ones, today the spread is a point and a half.
A point, which equals 1% of your mortgage amount, typically buys you an eighth to a quarter of a percentage point drop in your rate. Today some overloaded lenders are knocking half a percentage point off for those who pay a point, hoping this extra initial cost will deter serial refinancers.
If you're planning to stay put for about five years, it may be worth it. Conversely, consider adding an eighth of a percentage point to your rate to lock it in for 45 days. Banks and lenders are putting a lot more effort into vetting applications, so it can take up to two months to close a loan, vs. about 30 days in the past; you don't want to risk rates' moving against you while you wait. The payoff for patience: a loan you can live with, for a very long time.