Effective December 13, 2008 Some Conforming Mortgages Will Require Larger Down Payments To Get Approved

In an effort to limit risky borrower behavior, Fannie Mae announced a new round of mortgage guideline changes last week.

Unlike its previous 20-plus updates that raised income requirements and minimum credit scores (among other changes), Fannie's latest guideline tweaks focus on the value of its underlying mortgage assets -- home equity.

Effective December 13, 2008, Fannie Mae will require larger equity positions on some of its insured purchases and refinances.

A few of the updates include:
-- Limiting primary residence, cash out refinances to 85% loan-to-value
-- Requiring 10% downpayments on second/vacation homes
-- Requiring a 25% equity position on all investment property refinances

And, while the above changes represent 5 percent equity increases over the current mortgage guidelines, some of the other updates call for increases of as much as 20 percent.

As we head into the election and Congress mulls over another economic stimulus package, it's unclear if mortgage rates will move higher or lower as we close out the year. We do know, however, that getting approved for a conforming mortgage will, in general, be harder come December 13, 2008.

If you're finding yourself on the fence about your next move -- whether it's to buy or to refinance -- consider taking the necessary steps before the guidelines change.

Low, low mortgage rates don't mean much if you don't have enough home equity to get a home loan approval.

(Image courtesy: The New York Times)

Mortgage Guidelines Getting Tougher For Everyone

It's not your imagination -- getting approved for a home loan is becoming increasingly more difficult.

Taken from the Federal Reserve's quarterly survey of 84 banks, it illustrates the changing dynamic of mortgage guidelines.

Most notable is the steep curve for "prime" mortgages, a type of home loan given to applicants exhibiting:

*A well-documented credit history
*High credit scores
*Low debt-to-incomes

Americans have come to expect sub-prime loans to be tougher, but it's the sharp tightening of prime guidelines shows us that nobody is exempt from the newfound underwriting prudence that banks are exhibiting right now.

If you plan to buy or remortgage a home over the next year, consider a popular expression in financial circles -- the trend is your friend.

Know that mortgage guidelines will get tougher before they get easier and applicants on the cusp of being approved today will almost certainly be denied a mortgage three months down the road.
Owning real estate and making sound financial decisions requires a tremendous amount of advance planning and, sometimes, looking at the past is the best way to prepare for what's coming ahead.

According to the Federal Reserve's survey, what's coming ahead more mortgage application scrutiny.

Why July May Be The Best Time To Write A Purchase Contract In 2008

It's a terrific time to buy a home, but not because homes happen to be affordable.

It's a terrific time to buy because the variety of mortgage products available to home buyers looks poised to shrink.

Monday, Alt-A mortgage lender IndyMac Bank stopped accepting mortgage applications and it's likely that other Alt-A lenders will likely follow suit.

Alt-A loans are ones in which borrowers can't (or won't) verify one of two major underwriting criteria:

1. Evidence of income

2. Evidence of assets

Since the Credit Crunch began last July, Alt-A mortgages have been a steady source of funds for "in-between" borrowers -- those that are not quite prime, and not quite sub-prime. IndyMac was among the largest lenders of its type and had outlasted many of its peers.

Its position as a market leader and subsequent exit from lending means that the remaining Alt-A lenders will likely make one of two choices in the coming weeks:

1. Raise rates and fees because of greater Alt-A mortgage risk, or

2. Follow IndyMac's lead and exit mortgage lending altogether

Both outcomes would be harsh for home buyers of all types because when any large bank takes mortgage-related losses like IndyMac just did, it tends to create major risk aversion in the market.

Risk aversion impacts everyone -- even the "good" borrowers.

Banks have been nervous about lending for several months and so they'd rather pass on an "average" mortgage application rather than risk getting stuck with a potentially "bad" one.

IndyMac's exit may cause fewer mortgages to get approved.

In other words, buyers eligible for financing today may be ineligible tomorrow.

Therefore, if you're a home buyer and you know your credit profile is less-than-ideal, consider writing a purchase contract sooner rather than later. Your mortgage options may be thinning, and the ones you have may be getting more expensive.

You're Not Immune -- No Matter What Your Credit Profile Looks Like

Four times annually, the Federal Reserve surveys 84 different banks about general banking conditions.

One of the survey questions asks about current mortgage lending standards and whether they are loosening or tightening.

The chart at right is from the April 2008 survey and it illustrates what we already know: It's getting tougher and tougher to get approved for a home loan.

Some of the areas in which mortgage guidelines are tightening are well-known:

--More thorough income documentation

--Higher credit score requirements

--More "money in the bank" post-closing

Some areas are less well-known:

--More scrutiny of prior delinquencies

--Strict review of appraised values

Overall, getting a mortgage approval from a bank is more difficult than in months past and the tightening trend is expected to continue throughout the rest of the credit cycle.

No "class" of buyers is immune, either -- not even the "prime" ones.
Home prices may fall going forward but stricter mortgage guidelines means that fewer home buyers will be able to take advantage. If you're unsure about your credit profile, check with your loan officer to see how additional restrictions could impact your ability to purchase (and finance!) a home.

Now or Later

For Americans wanting to buy a new home or refinance their current one there are always two times to do it:

1. Now
2. Later

So why ask a mortgage guy if now is a good time or not? Because no matter how low houses go this year, if you can't get a loan to help you buy it, it will do you no good.

Over the past few months I have seen a lot of changes to different loan programs out there and I believe many more changes are coming. So is now I good time to buy or refinance, I would say it absolutely is!

So why is it a good time to buy now? Because none of us mortgage guys can predict what the market will be doing later.

"Now" is full of knowns. "Later" is full of unknowns.

The mortgage markets are tightening (less money in them) and so lenders have no choice but to tighten their lending practices. Think of it this way, if you only have so much money to lend won't you just want to lend it to the "best" people, the ones you are very sure will be able to pay it back?!

What are these changes that will take place?

I believe their

1. Second Mortgages -- currently most banks will allow you to go up to 90% of the value of your home, soon it will drop to 80%
2. Credit scores -- currently a 680 score puts you in the safe zone for pricing, expect that score to go up to 720.
3. More money down -- currently there are still no money down options, expect everything to grow by 5% down. So if you were putting nothing down before, now it will be 5%, or if you were putting 10% down for a program soon it will be 15%.
4. Stated income programs -- we currently can still do them, but some lenders have already started to drop those programs, because of the obvious risks associated with them.
5. Property type -- now condos and single family residences are treated basically the same when lending money, expect that to change, you will be required to put more money down on a condo then a single family residence.
6. Every mortgage product will get an overhaul -- Expect many of the products you know now to change in the next little bit.

So back to the question, is now a good time to buy???

Yes it is, not because home prices are priced low right now, but because come Fall you may not be able to purchase a home because of lack of credit, down payment or any of the reasons listed above.