The Mortgage Bankers Association released the National Delinquency Survey last week, reporting that the increase in foreclosure rates between quarters has reached its highest point since 1972 (when the records were first kept). The increase in foreclosures on first time mortgages increased by 36% between the first quarter 2008 and first quarter 2009.
Little wonder why lenders are scrutinizing loan applications with an even finer toothed comb.
Nor should it come as any surprise that lending guidelines are getting even tighter than they already are. Fannie Mae recently announced several new underwriting / eligibility guidelines that will become effective September 1st.
Some key changes all Chicago area home buyers (and their agents) need to know:
- Buyers wishing to purchase owner occupied 2 flats will need to make 20% down payments. Investment 2 flats will be limited to 75% loans. (These new loan to value ratios conform to existing standards for 3 & 4 unit buildings).
- Stocks, bonds, and mutual funds will only be valued at 70% of the current worth (reduced from 100%); Retirement accounts at 60% reduced from 70%). Stock options & non-vested restricted stock will not be eligible for use as reserves at all. (Lenders are hedging against further stock market declines)
- "Trailing secondary wage earner income" will be disallowed. (projected employment & income anticipated, but not currently earned by a borrower, such as a spouse relocating who is currently employed but does not yet have a job lined up here in Chicago).
- Tip income can only be used qualify for loans if a borrower can prove tip earnings for two years and if his or her employer indicates that tip income will "in all probability" continue. Such income will be counted based on a 2 year average.
- The maximum age of credit documents will be reduced from 120 days to 90 days. (The paperwork used to "prove" a borrowers assets and income). New construction buyers get 30 days more - Buyers need to have good (current) records of their assets to support their applications.
- 2nd loans & HELOC lenders will be allowed to recoup closing costs paid on behalf of the borrower if the borrower pays the HELOC or second mortgage off early, regardless of whether the lender labels this as a prepayment penalty. (Costs on 2nd loans are going to go up).
- Borrowers will be required give lenders two sets of tax return authorization forms (once during the application process, and again at closing). Fannie is strongly encouraging lenders to actually pull tax returns from the IRS as part of the underwriting process
- Final pre-closing verifications of employment must be well documented.
Buyers relocating to Chicago, Commissioned and tip-based workers, and folks intending to buy two-flats are going to be most severly impacted by these changes. But even with these new guidelines, well qualified Buyers will still be able to find lenders willing and able to make loans. It is just going to take a whole lot more effort to prove that they are indeed well qualified and they might find that they will be able to borrower substantially less money than they might have otherwise hoped to.
Savvy Buyer-agents are well advised to encourae their clients to start the loan pre-qualification process early, so that they can know know exactly what type of documentation they will need to gather for their loan underwriters and so that they can make reaslistic assessments of the loans they will be able to qualify for.
As always, I am available to answer questions about these guideline changes, and to help with other closing-related matter.