The underwriting guidelines from Freddie Mac and Fannie Mae form the cornerstone of the mortgage underwriting process. It is important for lenders to strictly adhere to these guidelines because they form the foundation of the rules that govern mortgage loans.
With changing economic conditions, both the government agencies change the underwriting guidelines to ensure borrowing and lending are carried out fairly and in true spirit. In this blog we would like to highlight some of the latest mandates formulated by these two bodies to regulate the lending landscape.
Fannie Mae Guidelines
Fannie mae guidelines for underwriting in verifying the lender’s responsibilities and the eligibility of the borrower’s is as follows:-
- The lender must obtain a complete and a signed report that accurately represents the market value, condition and marketability of the property that the borrower is looking to buy
- It is the lender’s responsibility to ensure that a borrower provides adequate collateral for the mortgage
- The property specific documentation that the lender must compile in order to conclude that the borrower is a safe risk include: a copy of the recorded deed, deed of trust, a title report, a title commitment or binder, a recent tax assessment notice and a property sale history report.
- To ensure that the borrower is a safe risk, their employment history, network, income, credit rating, loan-to -value ratio and debt-to-income ratio will all be requested and verified for accuracy.
- It is the duty of the lender to confirm the identity of the borrower prior to the extension of the credit. The borrower must show interest in owning the property and become liable for it by signing the security instrument, the deed of trust note and by taking the title to the property
- In the case of a self-employed borrower, lenders are required to obtain a two year history of the borrower’s earnings as a means of demonstrating that the income will continue to be received.
- All approved lenders must submit Form 582, Form 1001 and Form 1002 annually to maintain eligibility as a Fannie Mae customer.
- Fannie mae facilitates lenders to provide higher mortgage loan amounts on a property that is a primary residence when compared to an investment property.
- Lenders are required to ensure that borrowers have a minimum credit score requirement that ranges from 620 to 680 with minimum loan to values of 75 percent
- To ensure that the borrower is a safe risk, their employment history, net work, income, credit rating, loan-to -value ratio and debt-to-income ratio will all be requested and verified for accuracy.
- Lenders are also responsible for meeting certain standards. The organization will be studied to determine that they are properly licensed and have enough experience in the industry to manage underwriting.
- In addition, lenders must have a large workforce and the organizational capability to handle the loan as well as a minimum net worth of $2.5 million.
- Since the lender is responsible for initiating, selling or servicing the loan, the organization must be able to demonstrate adequate internal management and auditing mechanisms to handle the volume of their mortgage underwriting business.
- Lenders must check that they are cooperating under the most recent guidelines, which are occasionally updated by Fannie Mae. (Check www.fanniemae.com for details)
- Fannie Mae now requires lenders to provide documentation for bank deposits larger than 25% of their total monthly income.
Freddie Mac Guidelines
More home buyers can get 2018 mortgages without having to pay higher interest rates on jumbo mortgage loans. Jumbo mortgage loans exceed the conforming loan limit in order to facilitate the purchase of a high priced luxury home, for a borrower. They also attract a higher rate of interest. The standard base loan limit has been raised to $453,100, making it the first increase in a decade. This is due to the rising property values.
- Lenders may give borrowers a PIW (Property Inspection Waiver). In order for a borrower to qualify for this, the loan must be underwritten using the Home Value Explorer (HVE), a Freddie Mac tool that estimates property value.
- As per the 2018 guidelines, lenders cannot provide a Freddie Mac loan for borrowers to rebuild a destroyed or heavily damaged home that is located in wetland regions, if the state law does not allow for the home to be rebuilt. Coastal tideland, wetlands and set back laws apply to properties located in these regions.
- Freddie Mac underwriting guidelines will be more relaxed for homes fitted with solar panels. The guidelines instruct underwriters to ignore lease payment for solar panels from the DTI (debt to income ratios) of the applicants
- Following the expiration of HAMP, Freddie Mac has initiated a new loan modification program to reduce the frequency of foreclosures called ‘Flex modification’ that is now in full effect.
- Freddie Mac now allows lenders to facilitate loans for borrowers with a debt to income ratio of upto 50%
- The eligibility of potential homeowners is important, as mentioned above, since the lender will not be able to assist applicants with a poor profile (such as poor credit or debt to income ratios) under the Freddie Mac or Fannie Mae guidelines.
- If the guidelines are not followed, lenders will not be able to partner with Fannie Mae and Freddie Mac. For this reason, many lenders adopt an across-the-board set of guidelines that mirror both organizations in order to easily do business with the organization.