[Loan Doctor]

On 31 March Fannie Mae is making changes to their Automated Underwriting System (AUS) approvals. If this is confusing in any way, please post questions and I will clarify.

Below are some of the changes customers should expect to see:
• Improved credit quality across all DU recommendation levels, especially for Expanded Approval® (EA) recommendations.
(This means that if the borrower's profile does not qualify for the top approval-Approve Eligible-it will be harder to get a good EA Approval with a decent rate)
• Some loan casefiles will receive more conservative recommendations, while others may receive improved recommendations when compared to similar loan casefiles submitted to DU Version 5.7. (This means that if you have good assets, long job history, long current residence time-you will have a better chance of getting the favored Approve-Eligible approval the borrower wants to get
• Reduced Approve and/or EA recommendation rates, although the overall impact will vary depending on the mix of business the customer submits to DU. (This means that the broker you work with will get better rates if a larger percentage of their business is with better quality loans)

Total Expense Ratio
With this release, the maximum allowable total expense ratio in DU will be updated to take into account certain risk factors contained within the loan casefile. In general, the updates to the maximum allowable total expense ratio in DU Version 7.0 will be more conservative than in previous versions of DU.
If current debts exceed the maximum allowable total expense ratio, loan casefiles that would have otherwise received an Approve recommendation will receive a Refer recommendation, and loan casefiles that receive a recommendation other than Approve or Refer will receive an Ineligible recommendation.
Minimum Credit Score Requirements
As stated in Announcement 08-08, Fannie Mae is establishing a minimum “representative” credit score of 580 for all loans delivered to Fannie Mae that are underwritten through DU Version 7.0. Although DU does not use credit scores in its risk assessment, loan casefiles submitted to DU Version 7.0 with a “representative” credit score below 580 will receive an Ineligible recommendation.
Adequacy of Funds
DU will no longer issue a Refer recommendation for a loan casefile due to insufficient funds to close. However, if at any time the borrowers’ funds are less than those required, DU will issue a message stating that the required funds must be obtained from eligible sources and must be qualified and verified prior to closing.
Mortgage Delinquencies
Loan casefiles in which the borrower’s credit report contains a mortgage tradeline that was reported within the last six months, and was 60 or more days past due when the account was last reported, will receive a Refer with Caution/IV recommendation. However, if the mortgage tradeline was not 60 days or more past due when the account was last reported, but has been 60 days or more past due in the last 12 months, the loan casefile will receive an Ineligible recommendation.
Foreclosures
As stated in Announcement 08-08, Fannie Mae is modifying its policy on prior foreclosures. If a foreclosure was reported within five years of the credit report date, the loan casefile will receive a Refer with Caution/IV recommendation.
DU will no longer issue a Refer recommendation when the date of a foreclosure cannot be determined. However, DU will issue a message stating that if the foreclosure was filed within the last five years and has not been satisfied, the loan is not eligible for delivery to Fannie Mae
Bankruptcies
DU will no longer issue a Refer recommendation when the date of a bankruptcy cannot be determined. However, DU will issue a message stating that if the bankruptcy was filed within the last 24 months the loan is not eligible for delivery to Fannie Mae. In addition, if the bankruptcy is not fully discharged, the loan is not eligible for delivery to Fannie Mae

[Hedwig]

What is the total debt ratio allowable, and is it debt to income?

Does the debt to available credit enter into this at all, or only into score determinations?

[Loan Doctor]

Questions like this are frustrating for me. Under current guidelines Fannie Mae and Freddie Mac allow a maximum of 28% for the front ratio and 36% for the back ratio. (28/36)
Where front end is just housing expense and back ratio is total debt of minimum payments plus future housing expenses. Does not take into consideration available credit-but your credit scores will reflect that information.

What makes it frustrating is that with compensating factors (Long Job history, higher amounts of liquid assets, number of older tradelines) I have seen approvals with ratios much higher than that, like 50% and more. So it is just going to be a trial and error type learning curve. I enjoy playing around with loans to see what can be changed to get an approval. With FHA it is easily possible to go over their stated limits when you know what to change when playing the "what if" game.

Charles

[jlynn]

So basically you have to have a 580 score, no BK's in two years, no 60+day lates in 12 months on a mortgage, no foreclosures in 5 years, and adequate funds to close on submission, to even talk to Fannie Mae?

[Loan Doctor]

That is correct. Freddie Mac has not yet made similar changes-so many banks are going to use them for a while to package loans, instead of Fannie Mae. Also these rules are just conventional loan program changes-have nothing to do with government loan programs.

Charles