Unlike past revisions in which Fannie Mae tightened debt ratio and credit scoring requirements, however, the newest underwriting updates home equity and home buyer downpayments.
This is consistent with the emerging underwriting philosophy that Collateral is King.
No home equity, no downpayment, no loan.
Effective December 13, 2008, Fannie Mae will enforce the following single-family residence restrictions:
- Primary residence, "cash out" refinances are limited to 85% loan-to-value
- Second home, cash out refinances are limited to 75% loan-to-value
- Investment properties cannot be refinanced without a 25% equity position
Each bullet point represents a 5 percent tightening over the previous guidelines.
Now, to be clear, Fannie Mae isn't the only source for mortgage money. The others are comprised by the FHA, the VA, and an innumerable amount of portfolio lenders. To date, these groups have yet to announce similar loan-to-value restrictions.
But, because Fannie Mae (along with Freddie Mac) guarantees almost half of the nation's home loans, it does swing a big stick. Historically, when Fannie Mae gets tight with its money, the other groups tend to follow.
Starting 45 days from now, qualifying for a conforming mortgage will require more home equity than at any time since 2003.
Now, there are a lot of people sitting around right now, waiting for mortgage rates to fall before buying or refinancing their home.
I'd offer a more prudent idea: Just get on with it already.
None of us can predict what where mortgage rates will go. Recession, inflation, whatever -- it's a big mystery. But, we do know with 100% certainty that guidelines will tighten effective December 13, 2008, and it will prohibit Americans from getting access to mortgages.
We know this because Fannie Mae published it on its Web site.
If you're buying a home or in need of a refinance, consider moving up your timeline. If rates fall after-the-fact, you can always try to refinance into something less expensive. But if guidelines shut you out, there's nothing you can do about in hindsight.
If you know you need a conforming mortgage or a jumbo mortgage, just take care of it. Great low rates don't mean a thing if you can't get qualified. And starting December 13, 2008, the qualifying hurdles are going to be raised.