Mortgages Simplied by Fannie Mae

Brass pendulum, tool for dowsing.

Mortgages Just Got Simpler

Unreimbursed business expenses, complex reserve requirements, retirement account value and paper-trailing down payment funds are all guidelines born out of our housing crisis.  Mortgage Lenders and clients alike have toiled and tangled with these rules for years!

Finally, as a result of Fannie Mae feeling that we are through the housing crisis, they are now repealing some of the guidelines they put in place during that exciting time period J.   Effective immediately per Fannie Mae (note: Fannie Mae will not be updating their software/DU to reflect these changes until 08/15/2015), the following will be making the mortgage process a bit more streamlined Conventional Mortgages:

 1. No More Conversion of Primary Residence Reserve Requirement:

OLD: Borrower must show they have a specific amount of reserves/assets (non-gifted assets) left over after they pay down payment and closing costs when converting their current primary residence into a rental property.  The amount was based on whether the home being converted had more or less than 30% equity in it.  It was equal to either 6x’s or 2x’s their new mortgage payment plus their old mortgage payment.

NEW: There is no separate reserve guideline related to a primary residence conversion.   Borrower does NOT have to have a set amount of reserves/assets (non-gifted assets) left over after paying down payment and closing costs on their new home related to the conversion of their old primary residence into a rental.  Now, reserve requirements will simply be based on what Fannie Mae’s automated findings state without the OLD extra added reserve requirement of either 2x’s or 6x’s the new mortgage and the old mortgage payment combined.

2. Stocks, Bonds, Mutual Funds & Retirement Accounts – 100% Value Given(Vested Accts):

OLD:  Borrower’s vested balance in a stock, bond, mutual fund and/or retirement account was cut by 30% to 40% prior to an underwriter giving it value on a loan application.  For example, vested funds equal to $100k in a 401k account would only count as $70k toward a borrower’s loan application.

NEW: Borrower’s vested balance in a stock, bond, mutual fund and/or retirement account will receive 100% valuation on a their loan application.  For example, vested funds equal to $100k in a 401k account will count as $100k on a borrower’s loan application.  Note non-vested balances may not be used to qualify a borrower

3. Unreimbursed Business Expenses (“2106 expenses”) Not Deducted From Income:

OLD: All borrowers who had unreimbursed business expenses showing on a form 2106 on their Federal Tax Return often had those expenses deducted from the income used to qualify them for a mortgage(except qualified expenses such as business miles etc…).  For example, if a borrower made $100k in a year and had $10k in unreimbursed/2106 expenses an underwriter would typically only give that borrower $90k/year in effective income to qualify.

NEW: All borrowers using base wage, bonus, overtime and/or commission income less than 25% of their total income no longer need to have unreimbursed business/2106 expenses deducted from their effective income.  For example, if a borrower makes $100k in a year and has $10k in unreimbursed business expenses and they do not earn any commission income, an underwriter will give that borrower $100k/year in effective income on their loan application.

4. No Documenting Retirement or Brokerage Acct Liquidation (in certain cases):

OLD: Borrowers were required to paper trail the liquidation of funds being used for down payment and/or closing costs when those funds came from a stock, bond, mutual fund or retirement account.

NEW: If borrowers vested balance is equal to at least 20% more than the funds needed for down payment and closing costs no documentation or paper trail will be needed relative to funds being used from a stock, bond, mutual fund and/or retirement account.

Fannie Leads, More to Follow?

At this point, these guidelines are applicable to only Fannie Mae backed Conventional loans.  Freddie Mac will likely follow shortly however sometimes they are 6 months to a few years late to the party.  These changes also do not apply to FHA, VA, USDA or Jumbo loans.  I know the timing of  the software/DU update and the effective date may be confusing so please let me know if you have any questions at all.

By Jeremy House

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Jeremy is the Founder of The HOUSE Team and a Sr. Loan Officer/Branch Manager with PrimeLending. Over the past several years he has ranked in the top 1% of all loan officers nationwide and one of the top 200 loan officers in America. In the mortgage industry, the devil is in the details. Jeremy prides himself on being a student and an expert when it comes to everything mortgage related.

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