Fannie Mae recently released an update to their Selling Guide (the place all of Fannie Mae’s guidelines are published). Below is a brief run down of these changes:
Updates affecting Ohio HARP refinances
- Multiple Financed Properties for the Same Borrower – until now, a homeowner refinancing with the HARP program had to meet Fannie Mae’s guidelines about multiple financed properties (capped at 10). With the recent update, HARP loans are exempt from this requirement.
- Borrower Eligibility (removing borrowers from the new HARP loan) – Fannie Mae now allows borrowers to be removed from the new HARP refinance as long as the borrower is also removed from the deed and retains no ownership rights to the property as long as one of the existing borrowers stay on the new HARP loan.
Updates affecting Ohio Conforming Loan insured by Fannie Mae
- Variable Income (such as hourly, overtime, bonus, and commission income) – A 2 year history is recommended, but 12-24 months may be acceptable if there are positive factors that reasonably offset the shorter income history.
- If the income trend (current to past years) is stable or increasing, the income should be average.
- If the income trend (current to past years) is declining, but has since stabilized and there is no reason to believe that the borrower will not continue to be employed at the current level, the current, lower amount of variable income must be used.
- If the income trend (current to past years) is declining, the income may not be stable. Additional analysis must be conducted to decide if any variable income should be used, but in no instance may it be averaged over the period when the declining income occurred.
- Continuity of Income (how long will the income used continue) – If the income does not have a defined expiration date and history of receipt of the income is documented, the lender may conclude that the income is stable, predictable, and likely to continue. If the income source does have a defined expiration date or is dependent on the depletion of an asset account or other limited benefit, the lender must document the likelihood of continued receipt of the income for at least three years. Some examples of income that lenders will need documentation showing 3 years continuance are
- Alimony or Child Support
- Distributions from a retirement account
- Social Security (not including retirement or long-term disability)
- Determining the need for Federal Income Tax Returns – lenders must get copies of the borrower’s signed federal income tax returns for the past 2 years for the following sources of income or employment:
- 25% or more of his/her income from commissions
- employed by family members
- receives rental income from an investment property
- receives income from capital gains, royalties, real estate or other miscellaneous non-employment earnest reported on IRS form 1099
- receives interest and dividend income
- receives income from sole proprietorships, limited liability companies, partnerships, or corporations, or any other type of business structure in which the borrower has a 25% or greater ownership interest.
- Alimony or Child Support Income – in the past Fannie Mae required lenders to document that the borrower had received this income for each of the past 12 months. This update now requires lenders check the payment history and for it to be considered stable income, full, timely payments must have been received for six months or longer.
- Employment Offers or Contracts – this update gives lenders the ability to use the borrower’s offer letter or contract for future employment and income to qualify for the loan. However, the borrower must begin employment before the lender delivers the loan to Fannie Mae. My assumption is that lenders will require that a borrower begins employment prior to the loan closing.
All in all, these new guidelines make it seem that Fannie Mae just might be loosening up on their underwriting requirements. The next step will be whether lenders actually carry out these revised guidelines, or if they decide to stick with the old, more restrictive requirements.
Remember, Fannie Mae (and Freddie Mac, FHA, USDA, VA, etc.) guidelines set the minimum that lenders must document. Lenders have the ability to require more documentation from a borrower.
