Updates in Underwriting: Fannie Mae Guidelines Have Changed
Earlier this summer, Fannie Mae announced several guideline changes that have a fairly significant impact on the home buying process. As you may have noticed, these regulatory changes went into effect this past week.
As your trusted mortgage partner, we wanted to make you aware of the changes that were implemented and how they will impact the home buying process moving forward. The good news is that many of these changes have relaxed qualification requirements and documentation procedures, making it easier for some buyers to purchase a home.
Here is a list of the Fannie Mae guideline changes you should be aware of:
Conversion of Principal Residence
In the past, if someone was purchasing a new home while retaining their former residence, Fannie Mae used to require a significant amount of reserves to ensure the borrower had enough funds available to cover the cost of both of the homes. The amount of reserves required were based on how much equity one had in their principal residence.
Many times, people had enough money to purchase a home and adequate cash flow to afford their existing mortgage, but they did not have several months of mortgage payments stockpiled in their savings account. This made qualifying under these circumstances difficult.
Under the new Fannie Mae guidelines, we are no longer required to document a borrower’s equity in their former residence. Instead, we now follow the standard rental income and financial reserve requirements when converting a principal residence into an investment property, which is significantly less than the amount of funds required before.
Using Stocks, Bonds and Mutual Funds as Reserves
The main benefit for borrowers here is that they can now use 100% of their stocks, bonds or mutual funds to meet the reserve requirement. Prior to this change, the amount of reserve funds that could be used from investments were often significantly reduced due to early withdraw fees. Now, borrowers are able to use the full amount.
However, if borrowers intend to use investment sources toward the actual cost of the loans, funds must be liquidated and transferred into their bank account. The key change here is that the liquidation documentation process has been streamlined, making the process more seamless for the buyer.
If it is documented that the value of the asset(s) is at least 20% more than the funds needed for closing, no documentation of liquidation is required. Otherwise, documentation of the borrower’s actual receipt of funds from the sale/liquidation is required.
Unreimbursed Employee Business Expense
As you may know, the IRS allows individuals to write off any work-related expenses that are not reimbursed by their employer. This typically shows up on Schedule A of their tax return. Prior to Fannie Mae’s new guideline changes, this amount would be deducted from their taxable income, thus reducing their qualifying income.
Under the new guidelines, it has been determined that these funds are only required to be deducted under special circumstances. This means borrowers have a greater opportunity to increase their qualifying income.
Borrowers who use base pay, bonus and overtime or commission income totaling less than 25% of their annual income are not subject to deductions.
The exception to this is if the expense is an actual automobile lease or loan payment. If borrowers report an automobile allowance as part of their monthly qualifying income, the lender must determine if the automobile expenses reported on IRS Form 2106 should be deducted from income or treated as a liability.
Also, if a borrower earns commissions greater than 25% of their total income, lenders are required under regulation to deduct unreimbursed expenses from their qualifying income.
Fannie Mae now provides guidance in cases where the borrower’s full amount of tip income may not be reported by the employer on the verification of employment, pay stub or W‐2. Under this new guideline, the borrower may report additional tip income to the IRS using Form 4137. This income may be used if the most recent two years of Federal Tax Returns including Form 4137 are obtained.
Simply put, when documented correctly, a borrower can use their tips to increase their qualifying income.
Using IRS W‐2 Transcripts in Lieu of W‐2
In cases where the borrower is unable to provide a W‐2, IRS “Wage and Income Transcripts” are now acceptable in lieu of actual W‐2 forms.
Prepayment Penalties on Subordinate Liens
The restriction that subordinate financing may not include any prepayment penalties or other prepayment restriction no longer applies.
The above-listed information provides a high-level overview of the new Fannie Mae guideline changes. To read up on the full details of each guideline, we encourage you to visit Fannie Mae’s website. Also, before taking action or providing advice related to these new regulatory changes, we recommend seeking the council of a certified mortgage professional. These new regulations serve as a guide, however some mortgage lenders may have their own restrictions based on their investment partners.
As your trusted mortgage partner, we are happy to answer any questions you have about these new regulatory changes. Please feel free to contact us here or give us a call at (800) 521-5362.