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Fannie Makes it More Difficult to Qualify for Interest Only Loans, ARMs

home loans

Mortgage financier Fannie Mae announced several changes last week that will make it more difficult for borrowers to take out interest-only loans and adjustable-rate mortgages.

Beginning in July, the qualifying rate on adjustable-rate mortgages with an initial fixed-rate period of five years of less will be the greater of the note rate plus 2%, or the fully indexed rate.

Essentially, borrowers won’t be able to use the interest-only rate they actually pay as the qualifying rate, making it more difficult to meet debt-to-income ratio requirements.

The move is intended to lessen the impact of payment shock, which has troubled borrowers unable to refinance after their ARMs went adjustable, mainly due to negative equity issues.

Fannie is also upping requirements for interest-only loans, calling for a minimum Fico score of 720 and 24 months of asset reserves.

Additionally, interest-only loans are no longer eligible for cash-out refinances, investment properties, 2-4 unit properties, and several other programs.

“With these changes, Fannie Mae has structured the interest-only option for borrowers who are in a position to choose it as a financial management tool, rather than as an affordability tool,” the company said in a lender letter.

“Borrower qualification is based on the borrower’s ability to sustain mortgage  payments subsequent to the initial interest-only period.”

When home prices were at their peak, an interest-only option was a necessity for many to simply get in the door…

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