There’s been a lot of talk lately about mortgage lenders easing credit standards as refinance volume wanes and purchase activity remains constrained by limited inventory.
Because more and more new entrants (many so-called disruptors) have joined the fray, and there’s a smaller pool of eligible mortgage borrowers, risk appetite is expected to rise in coming months.
In fact, a Fannie Mae survey released yesterday found that the share of lenders expecting to ease credit standards over the next quarter hit new all-time highs.
Fannie Mae Increasing Max DTI to 50%
First off, we’ve got Fannie Mae’s Desktop Underwriter (DU) Version 10.1 release slated for the weekend of July 29th.
The biggest change is that this version of DU will allow debt-to-income ratios as high as 50%, up from 45% currently.
For the record, you can get approved at the moment with a DTI as high as 50%, but Fannie requires additional compensating factors to support a DTI ratio between 45-50%, such as lots of assets and an excellent credit score.
With this release, that 50% DTI will be good to go because the DU risk assessment will automatically consider “a broad range of loan characteristics and borrower credit factors.”
In plain English, this means it’ll be easier to get approved for a mortgage with a high DTI ratio, and because Fannie is greenlighting it, banks and lenders will likely ease up and follow suit, ditching overlays in the process.
ARM LTVs Going Up
Along with the DTI change, Fannie will soon permit loan-to-value ratios on adjustable-rate mortgages up to 95%. That means you only need 5% equity to get an ARM.
The rule will align LTVs on ARMs with those on fixed-rate mortgages, which are deemed lower risk, across all transaction, occupancy, and property types.
For example, someone buying a two-unit owner-occupied property is currently limited to an LTV of 75% if they elect to use an ARM to finance it.
When DU 10.1 is rolled out, this max LTV will increase to 85%, so they’ll only need to put 15% down instead of 25%.
A four-unit owner-occupied property will see the max LTV rise from 65% to 75%.
Similar increases will be seen in a variety of scenarios, meaning more borrowers will be able to, well, borrow more.
I’m assuming the 97% LTV offering from Fannie will still only permit a fixed-rate mortgage, for obvious reasons.
It’ll also get easier to borrow if you’re self-employed, with Fannie’s newest version of DU more likely to require just one year of personal and business tax returns.
That should mean less headaches and paperwork, and potentially more approvals if two years of documentation don’t paint your business in as favorable a light.
Finally, Fannie will ease up on borrowers with disputed credit tradelines so that if DU approves the file, no more action will be necessary.
Less Redundancy, More Approved Loans
In summary, it sounds like Fannie will be relying more upon its computer (algorithm) to do the underwriting going forward so that redundant documentation and scrutiny won’t be required.
If you think about it, why should you have to further explain stuff that’s already been taken into account and factored into the automated approval?
These changes, along with other recent enhancements, like more forgiving student loan payment calculations, should make it easier for more folks to get mortgages.
And it could just be the tip of the iceberg. We already discussed the idea of 10% down being the new normal, and the coming removal of tax liens and civil judgments from credit reports might bring even more borrowers into the game.
For the record, Fannie performed an analysis to see what approvals would look like without those derogatory accounts on credit reports and found that the impact would be “small,” and said lenders can remain confident in DU.
Still, cleaner credit reports might result in hundreds of thousands of newly-eligible mortgage borrowers out there.
And altogether, these underwriting changes may affect millions of prospective buyers and those looking to refinance.