Fannie Mae Cheatsheet : New Guidelines Start Monday, June 2, 2008

This weekend, Fannie Mae is overhauling its mortgage approval system. Earning an "Approve/Eligible" is going to be decidedly tougher than in the past.

For home buyers that have been in the market since January, this is not news; Fannie has been steadily trimming its serviceable market. Its changes were like duct tape on a leaky vessel.

Starting Monday, it's a brand-new bag and approvals may be sparse.

The good news for borrowers is that Fannie Mae is warning us of the change and will honor all approvals on the "old" system for 120 days.

Therefore, if you know you'll need a new conforming mortgage within the next 4 months and don't already have a Fannie Mae pre-approval, type this BASIC program into your Commodore 64 and watch the output:
10 Give a complete mortgage application to your mortgage lender
20 Goto 10

Here's a quick look at the new guidelines and what's changing:
1. Higher levels of verifiable income now required
2. Condos are now considered very high risk versus a single-family residence
3. Paying private mortgage no longer makes borrowers less risky to banks
4. Piggybacking on somebody else's credit as an "authorized user" no longer allowed
5. 580 minimum credit scores for all home loans
6. Lengthened "cooling off" period from previous foreclosures and/or bankruptcies
7. 60-day mortgage lates are now considered very high risk
8. Cash-out remortgages are now considered much more risky than rate-and-term ones
9. Interest only home loans are now considered very high risk

If it seems like a long list, that's because it is. Home buyers hit by the changes may be subject to higher mortgage rates, higher loan fees, or an outright denial on their application.

Mortgage guidelines continue to tighten and many more homeowners are finding themselves outside the circle. At least this time, Fannie Mae is telegraphing the change.

Stay ahead of the game and get your mortgage approval into the system before the close of business Friday, May 30. The mortgage approval you save may be your own.

How Fannie And Freddie Are Making Refinancing Cost-Prohibitive

Mortgage rates have been trending lower for the last month or so.

Unfortunately, most people can't take advantage -- government-sponsored mortgage financiers have added mandatory mortgage fees that negate the discount.

It's like buying an item on sale, but having to pay twice the sales tax.

If you're not saving money, what's the point? And that rationale has stymied thousands of would-be refinancers around the country.

By preventing home owners from refinancing to lower rates with lower payments, the mandatory fees pull millions of dollars from the U.S. economy.

Some homeowners are exempt, however. Owners of single-family residences (including condos) whose credit scores are 720 or higher are not subject to the Fannie Mae-imposed fees. But if you live in a condo, don't expect to that credit score exemption to last for long.

Much like the current adjustments for multi-unit properties, expect that a property-type "tax" for condos will be applied in the next few months. It would apply to all credit profile equally.

Fannie Mae's Loan-Level Pricing Adjustment Chart

You may have heard me say that mortgage rates are down, but even though they are down, not everyone is eligible for the lower rates. This chart should help clarify.

To read it, just find the intersection of your credit score and loan-to-value. The number in the box is the mandatory mortgage fee that mortgage financier Fannie Mae tacks on to your closing costs.

The fee is calculated as:
(Mandatory Fee) = (Loan Size) * (Mortgage Pricing Adjustment) / 100

These added costs are making conforming remortgages cost-prohibitive for a lot of Americans.

The risk-based fees are officially called "Loan-Level Pricing Adjustments" although the abbreviated form of "LLPA" is used just as often. I tend to call them "risk-based fees" because it's easier to understand.

The fees shown above, by the way, are in addition to the universal fee of 0.25 on all home loans, regardless of credit score or LTV. That particular charge is called the "Adverse Market Delivery Charge" and went into effect in December 2007.

But the costs don't stop there. There are other more risk-based price changes for homeowners to know about. For example:

All 2-unit properties carry 0.500 in mandatory fees
All 3-4 unit properties carry 1.000 in mandatory fees
"Cash out" remortgages at all LTVs can add up to 0.500 in fees

The good news is the mandatory mortgage fees don't have to be paid at closing. Most mortgage lenders will trade 1.000 in fees for a quarter-percent increase in mortgage rate. This means that if your mortgage rate is 6.000% and your costs are 1.000, you can accept a 6.250% rate and skip the loan-level pricing adjustment in its entirety.

Wrapping the fees into the mortgage rate makes the monthly mortgage payment higher, but preserves a homeowner's liquidity and cash position.

Expect more risk-based fees throughout this year, especially for LTVs above 80 percent, and for specific property-types such as condos and multi-families. If you watch this 5-minute video, you'll see the bigger picture and how we got to this place.

The piling-on of risk-based fees makes now a good time to consider buying or remortgaging a home. Changes to pricing are made without advance notice and we all get taken by surprise. Always to our

detriment.

Mortgage rates may fall with the economy this year, but it won't matter if the cost of financing keeps increasing. If you're going to want a new home loan later this year, talk to your loan officer today and get a plan started.