Fannie Mae guideline changes will impact debt consolidation mortgages

November 17th, 2010

In what has become an annual event, on Dec. 12, 2010 Fannie Mae will release “Fannie Mae 8.2″ which will alter underwriting guidelines for its residential mortgages. In Fannie’s release of “Fannie Mae 8.0″ on Dec. 11, 2009 major guideline changes impacted mortgage applicants with changes to required credit scores, loan level pricing adjustments, loan to values and debt to income ratios. In the release notes for Fannie Mae 8.2 one of the most significant changes affects how debt is calculated in qualifying.

If you have been using a mortgage payment calculator or refinance calculator to determine your monthly savings with a mortgage refinance to consolidate your debt you may wish to submit your mortgage application well in advance of the changes effective Dec. 12.

Remaining payments

For many years, decades in fact, Fannie Mae guidelines have allowed lenders to exclude monthly obligations that have less than ten months of payments left before being paid off. For example if your car payment is $287 per month and you have a balance of $2,450 the $287 monthly payment would not be counted in your debt-to-income (DTI) qualification.

This exclusion allows you to qualify for a higher mortgage amount. Under current guidelines set to expire on Dec. 12, if you currently owe $3,000 on your car loan with a payment of $287 per month and your DTI is above qualifying guidelines you could pay down the auto loan to below a balance of $2,870 and qualify.

No longer. Under the new guidelines in effect with Fannie Mae 8.2 any debt with a monthly payment, no matter how many are remaining, is counted in your qualifying debt-to-income ratios. If you need to eliminate your auto payment to qualify, no more paying the balance down to less than ten payments remaining, now you must pay off the loan completely and show the account closed. And because of the verification of asset guidelines, if you do pay off your car loan make sure you can trace the source of funds used to pay it off.

Open lines of credit

Last Christmas season while shopping a department store offered you 15 percent off if you applied for their credit card and used it for your purchases. You made the application, were approved for the card and a $3,000 credit limit.

Being a prudent user of credit when you received your bill for your purchases, with a 15 percent discount, you paid off the balance in full to avoid any interest charges. Even if you owe nothing on the account, under Fannie Mae 8.2 this account will add a $10 “minimum payment” to your monthly debt obligations.

Effective Dec. 12, under Fannie Mae rules all accounts will count towards debt-to-income ratios. Previously mortgage applications approved using Fannie Mae’s Desktop Originator automated underwriting system would not “auto-populate” or pull into the mortgage application revolving accounts with balances under $100. Under new rules, all open accounts will be assessed a payment of either the minimum payment listed on the credit report, or if payment is missing on the report either $10 or 5 percent of the outstanding balance — whichever is greater.

Prequalification calculators have an entry for “other obligations” where you enter your monthly car payment(s), credit card payments and other obligations. When using this calculator in the future you will need to add to your “other obligations” $10 per open account for those with no balance.

Credit scores

Your first instinct may be to close all your open revolving credit obligations to avoid having $10 per account added to your obligations on your mortgage application. Be cautious however as closing several accounts at once may adversely impact your credit score. Before rushing to close accounts contact your mortgage professional for advice to ensure you will still be able to qualify for your refinance mortgage or new home loan.

If you are using a refinance calculator and considering a refinance mortgage to consolidate your debts and lower your total monthly payments it is advised that you submit your mortgage application soon to avoid the new guidelines under Fannie Mae 8.2 that will impact your ability to qualify, especially if you are not able to qualify for a Freddie Mac conventional or FHA mortgage.

Posted By :
Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years' experience in the mortgage industry.

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