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I just got a notice from Freddie Mac that they are discontinuing stated income loans.  Whether you are stating your income or stating your assets... they don't want anything to do with these loans after February of next year.

Now for a lot of people, this makes sense because this is what supposedly got us in the mess we are today.  But where it will really hit home is for investors and business owners who have really ugly returns.  By the time Fannie and Freddie put the loan file through the ringer, there is no money left to qualify.  Especially rental owners. 

Here is an example we ran into recently.  Rental owner buys a new multi-family unit in 2007.  They only owned it for a couple of months in that year and because they got such a good deal on the property it did not come with tenants (aka income). So the underwriter told us that they had to go based on the income reported in the most recent tax return and would not accept rental agreements or proof of rental deposits to show income in 2008. Now this was an overlay guideline that the lender put on top of the conforming rules.  but I hope you get my drift.

I have no idea how the non-conforming (non-Fannie and Freddie) programs will react to this news.  We will just need to wait and see.

For us, 99% of the time we are able to go full documentation with our clients. It is tough on some files, but we managed so far to fight our way through it!

DOUBLE WOW!

The bigger wow is they are putting in hard-and-fast maximum debt-to-income limits whether the file is manually underwritten or run through their automated system.

Now that is a big one!  So what does this mean?  Right now Freddie Mac and Fannie Mae have written guidelines on the maximum debt-to-income for any loan file.  But as an alternative to these rules they offer an automated system that will evaluate the entire loan and assess the risk on all factors of a loan to determine the maximum debt-to-income.  Often times... actually most of the time, you can push that debt-to-income ratio higher because of compensating factors.  An example would be someone who might not have great debt-to-income ratios but have half a million in the bank. They could push the debt-to-income ratio up because they have several years of reserves in the bank.

How I am reading this announcement is they will set strict rules on the maximum debt_to_income whether you get an automated approval or not.

This really is bigger news than the stated income bit and will affect many more people.  I will be eagerly watching what these limits come out as. 

In my opinion if the number is set low enough, it could take a huge percentage of Buyers out of the conforming loan market.

I have to say my job gets more interesting every day. We are getting really good at jumping these hurdles that keep getting thrown at us but these two items I mentioned above are more like mountains. 

This blog by:
Team Newington
Sacramento Mortgage Planners
(916) 687-6868
www.SuperiorLoanTeam.com