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Mortgage New Rules Post Subprime Era

July 20th, 2008 2:21 PM by Sam Kader

The days of 620 FICOs (traditional cutoff point between prime and subprime loans) are about over for non-conforming mortgages that are not being originated for sale to FNMA or FHLMC. Investors are too afraid to take the risk anymore. Other lenders have bumped up minimum scores for fully documented  new loans from 620 to 640 while others are requiring 720 as the minimum needed for any sort of limited documentation applications.

Other than FICO scores, other key underwriting factors under scrutiny include:

1. Loan-to-value ratios (LTV's). Some lenders are abandoning zero-down programs and others are requiring 10 percent minimum equity stakes.

2. Assets. Rather than a minimum of two months' worth of reserve, lenders now want to see six months for certain loan categories. At a minimum lenders would require one month paycheck stubs, two years of W-2's, three months of bank statements. For self-employed borrowers with 25% earning from commissions and bonuses, 2 years of income tax returns are required. Paperwork for bankcrupty filing within the last 7 years. Student loan deferral agreement if applicable.

A few don't during the process and after loan's closed. 

  • Do not increase debt burden after approval. It's common for lenders to rerun credit.
  • Do not open new credit cards since that will decrease FICO score.
  • Do not challenge lender's request for more documents.
  • Do not float interest rate.
  • Do not change employment.
  • Do not delay payment of your bills or rent.
  • Do not skip your mortgage payment.
  • Do not borrow more than what you can afford. The rule of thumb is your mortgage payment should be no more than 30% of your gross income.   

3. Restrictions on credit reports and appraisals. Lenders would only deal with approved credit report companies and appraisers.

Fannie Mae rolled out the newest version of its loan decision making software Desktop Underwriter on June 1, 2008. The new software will incorporate the company policy regarding the declining market through limiting risk layering and assess each loan more precisely. Under new standards, conforming lenders will require scores of at least 580 and borrowers will not be able to boose their scores by being listed as "authorized users" of credit cards owned by other people. Borrowers with mortgage lates within the last 12 months will be turned down and foreclosures within the last 5 years.

Starting Oct.1 2009, the Federal Reserve has banned stated-income subprime loans or liar's loans. Some of the  details under the new rule:

  • Borrowers cannot get higher-coast subprime loan unless the lender decides that you can afford the highest scheduled payments during the first seven years of the loan.
  • No prepayment penalties for ARM less than 4 years.
  • Impounds are required.

Though the market will eventually strikes for an equilibrium, the timing is undetermined. Please subscribe to my blog to keep yourself abreast as the waves subside.

Posted in:General
Posted by Sam Kader on July 20th, 2008 2:21 PM

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