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New Fannie Mae Rules

In an effort to return to more prudent underwriting, Fannie Mae announced that it is tightening lending standards for adjustable rate and interest-only mortgages.

First, to protect consumers from the potential impact of payment shock from adjustable rate mortgages (ARM) by qualifying them for potential upward adjustments to their housing payment, home buyers who acquire an ARM with an initial fixed period for five years or less must now qualify at the note rate plus 2% or at the fully indexed rate.

The impact of this underwriting change will not immediately be felt in the housing market because with currently low interest rates most consumers are choosing the security of a fixed-rate mortgage. Last year only 3% of consumers chose a conventional ARM. However, when interest rates rise ARMs will become more popular.

The second change is Fannie Mae is changing underwriting requirements for interest-only mortgages. The interest-only option is for borrowers who are in a position to choose it as a financial management tool rather than as a tool to make their monthly payments affordable. Borrowers must demonstrate the ability to qualify for the loan when the interest-only period ends and the payment is based on principal and interest. The borrower must also have a credit score of at least 720 and have 24 months of reserves.

Fannie Mae also announced the retirement of seven-year balloon mortgages as a standard mortgage product. Balloon mortgages typically offer lower interest rates but leave a significant balance due at maturity.

The changes for ARMs and interest-only mortgages are effective for new loans submitted to Fannie Mae for purchase starting on June 19.

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August 5, 2010 - Posted by | Uncategorized | ,

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