Your lender or mortgage broker may refer to “Fannie Mae Guidelines” when asking you for documentation supporting your loan application. They may have explained to you that you must qualify for the loan under those guidelines. What are they and will you qualify?
Fannie Mae is short for the Federal National Mortgage Association. Fannie Mae is the country’s second largest corporation and was established by an act of Congress in 1938. Fannie Mae was created to bring stability back to the housing industry after the depression. In 1968, Congress re-chartered Fannie Mae as a private company. Congress mandated that Fannie Mae operate with private capital, be self-sustaining, and enhance the flow of funds through the secondary market to homebuyers. It operates under a federal charter, which is called the Federal National Mortgage Association Charter Act. This act places certain rights and responsibilities on the company.
Fannie Mae does not directly loan money to you, the “primary” Borrower, but rather loans money in the “secondary market”, or to lending institutions. In short, by lending money to your lender, this frees up capital for your bank so they can go on to make more loans.
In order for Fannie Mae to buy single family home loans from mortgage bankers, savings and loan associations, commercial banks, and other financial institutions, the loans must conform to their set of “Fannie Mae guidelines.” Together with an acceptable credit score, they require certain “debt to income ratios.” These ratios are calculated as a percentage made up of of your monthly gross income in relation to how much goes toward housing expenses and to servicing such debt as auto loans, credit cards, home loans, and credit lines. You must be able to prove your employment and document your assets and liabilities (debt). Normally you will be required to verify two years employment. If you have a 25% or greater interest in a business, you would be considered self-employed. An accurate and reliable appraisal will be required. Fannie Mae requires that lenders use an appraiser who is licensed following their guidelines.
Fannie Mae only deals with mortgages made to individuals. A corporation or general partnership would not qualify for a Fannie Mae loan. Fannie Mae will allow a mortgage that has a co-borrower, and that person is not required to take title to the property. The income from the co-borrower will not be accepted for qualifying purposes, unless that person also signs on the promissory note.
Loans made for your principal residence, second home, or an investment property, all may qualify under a Fannie Mae loan program.
Fannie Mae sets loan limits with are linked to the Federal Housing Finance Board’s October single-family price survey. These loan limits are adjusted each year in accordance with the results of this housing survey. For example, the current loan limit for a single family residence is $417,000. (except in Alaska, Hawaii, and U.S. Virgin Islands, which carry a 50% higher limit). Loans made within Fannie Mae loan limit guidelines are termed “Qualifying” or “Conforming” loans. They generally carry lower interest rate levels than “Non-Conforming” or “Jumbo Loans.”
Copyright © 2012 Sandy Gadow This column may not be resold, reprinted, resyndicated, or redistributed without the written permission of Escrow Publishing Company.
How do I calculate my debt to income ratio?
There are two types of ratios which Fannie Mae uses to determine the eligibility of your loan. The first or “front end” ratio is measured by dividing your proposed total monthly housing expense (principal, interest, taxes and insurance) by your gross monthly income. The second ratio used is your “back end” or total monthly obligation-to-income ratio. The current acceptable standard is 28% for the front end and 45% for the back end. (28/45). You can calculate these ratios yourself to see where you stand.
Your total monthly payments (back end) will include the following:
- Mortgage payments, including principal, interest, taxes, insurance and association dues.
- Revolving credit card accounts (include the minimum payment on accounts)
- Co-signed loans
- Child support
- Note: You do not have to include: utilities, telephone, auto insurance or childcare.
The following strategies can improve your debt-to-income ratio.
- Make a larger down payment. By making a larger down payment, your monthly payment will go down and lower your debt to income ratio.
- Buy down the mortgage rate. Ask about paying extra or “buying down” the interest rate on your mortgage. A lower interest rate will result in a lower monthly payment and reduce your debt ratio.
- Consider a Co-Signer. A co-signer can add to your income which can help improve your ratio.
- Renegotiate with the Seller. If the above options are not possible, you can try negotiating with the seller for a reduced sales price.
What is a Jumbo Loan?
A jumbo loan is the same as a non-conforming loan. It is any loan which is made by an institutional lender which exceeds the Fannie Mae or Freddie Mac guidelines for a conforming loan.
You will save about a half percent in the interest rate on a conventional loan versus a jumbo loan, so if you can stay within the guidelines, it would be worth it.