The Federal Government is having to perform an interesting balancing act to attempt to stabilize the economy but defend against mounting mortgage losses. In the past month both FHA and FNMA have announced tightening guidelines. Some of these changes will make it more difficult for many homeowners to qualify for a much needed refinance or to buy a new home.
The actual changes for FNMA have been announced, while FHA has only announced that changes are on the way. The FNMA changes took effect with the release of their most recent software update, Desktop Underwriter 8.0.
Prior to the changes FNMA’s Desktop Underwriter would routinely accept Debt to Income Ratios as high as 64.99%. This would mean that a family earning $4,000 PRE TAX could have monthly debts that total $2,599 monthly. While this allowed many homeowners to purchase larger houses or accumulate considerable debt, it wasn’t ever in the homeowners best interest.
The fact that FNMA uses pre tax income means that with 64.99% going toward debt, it wouldn’t be possible to live. Let’s take a look at the numbers.
| Gross Income | $4,000 | |
| Income Taxes | $600 | |
| Debt Counted by FNMA | $2,599 | |
| Remaining Income | $901 |
The Debt Counted by FNMA does not include many of the costs of home-ownership and survival. It only counts mortgage payment, property taxes, hazard insurance, and loans. This does not include car insurance, electric bill, water bill, food, health care, phone service, or any other expenses of living.
So with our remaining $901 lets assume $200 monthly for Electric, $30 monthly for Water/Sewer, $40 for Phone (Cell or Home, but not both), and Car Insurance $180.
So a homeowner would now have $451 left without ever leaving the house, or eating! We’ll budget another $300 per month for food and $100 for Gas leaving the homeowner with $51. This doesn’t leave money for cable, oil changes, clothes, home repairs, entertainment, savings, or anything else.
Why would an agency like FNMA set their computer underwriting system to allow a homeowner to take on so much debt. Before the computer system was released the maximum debt to income ratio was set around 41% but with the release of DU back in the late 90’s the system has routinely allowed 64.99% of a homeowners income to be spent on debt. This most recent release sets the maximum back down to 45% which is a much more realistic percentage of income to be spent on debt.
My issue is not with the 45%, I think its a much smarter guidelines. My issue is all of the homeowners who were allowed to purchase homes using 64% of their income and now if they want to refinance to take advantage of today’s low interest rates they will not qualify.
Additionally, FNMA has raised their minimum credit score to 620, which I think was a smart move. Most of the large lending institutions had already set a minimum score of 620. This allowed a group of smaller lenders and brokers to continue offering loans between 580 and 620 with almost no competition. They used this as leverage to prey on homeowners and home buyers and charge exorbitant rates and fees. With these added fees and higher rates, these homeowners were again set up for failure.
Although FHA has not yet released the actual changes they will make, they have announced that they will be increasing minimum credit scores, increasing down payments, and increasing the monthly cost of FHA Mortgage Insurance Premiums. Once the new guidelines are released, I will be posting them here.