Mortgages are now simpler. It sounds strange, I know! Mortgage requirements such as un-reimbursed business expenses, complex reserve requirements, and restricted use of retirement accounts were ugly remnants of the housing crisis. These frustrating hurdles have flustered Mortgage Lenders and clients alike for years.
Finally, as a result of Fannie Mae believing the housing crisis is over some challenging guidelines are gone. Effective August 2016, the following Conventional home loan rules are history!
Conversion of Primary Residence Reserve Requirement – Removed
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.
No reserve requirement related to a primary residence conversion to a rental when buying a new primary. Unless otherwise noted by automated findings, a borrower does not need a set amount of money left over after paying for their down payment on their new home purchase. Typically, the automated system requires reserves for more risky and complex loan files.
Stocks, Bonds, Mutual Funds & Retirement Accounts at 70% Value – Revised
Borrower only allowed to count 70% of vested stock, bond, mutual fund and/or retirement account balance. For example, a vested balance of $100k in a 401k account only counted as $70k toward a borrower’s loan application.
Borrower allowed to count 100% of the vested balance in a stock, bond, mutual fund and/or retirement account on their loan application. For example, a vested balance of $100k in a 401k account counts as $100k on a borrower’s loan application.
Un-reimbursed Business Expenses Deducted From Income – Revised
Un-reimbursed business expenses from form 2106 on taxes were deducted from a borrower’s qualifying income. For example, a borrower earning $100k a year with $10k in un-reimbursed/2106 expenses received credit for only $90k in income ($100k – $10k).
Only borrower’s whose un-reimbursed business expenses total 25% or more of their total effective income have to deduct the expenses from their income. For example, a borrower earning $100k a year with $10k in un-reimbursed business expenses does not have to deduct the expenses from their effective income.
Retirement or Brokerage Funds Liquidation Requirement – Revised
Funds from retirement/brokerage accounts used to pay for closing costs and/or down payment had to be paper trailed. In other words, funds transferred from brokerage/retirement accounts must be fully documented.
Borrower’s with eligible assets totaling 120% or more of the cash required to close do not need to document funds transferring from retirement/brokerage. In fact, all they need to provide is a copy of the most recent 2 months or most recent quarterly statement.
Finally, Fannie Mae took one step toward normalcy in mortgage lending. However, we still have a long way to go before the journey is through.
By Jeremy House