Suddenly, the phrase "cleared to close" doesn't mean so much.

Because of a new Fannie Mae policy, a mortgage lender's commitment to fund isn't final until it's final.  Lenders have reason to revoke a person's mortgage approval all the way up until the point of funding.

Scary, scary stuff.

Fannie Mae's "Loan Quality Initiative"

It's called the Loan Quality Initiative. In an attempt to minimize "bad loans", Fannie Mae has told lenders to take more responsibility for their files, and has put them on the hook if loans go bad.

The Loan Quality Initiative is Fannie Mae's response to surging foreclosures. The program shifts the onus of mortgage guideline compliance away from the government-backed group and to the individual banks responsible for making loans.

The LQI scope is broad, taking 9 pages in summary and, for the most part, mortgage applicants won't be bothered with the changes. It's just a lot of extra work for the bank -- things like Social Security Number validation checks and borrower occupancy standards.

There is, however, one major consumer hurdle. And it's a doozy.

Beware The 11th-Hour Credit Score Repull

In the new LQI environment, Fannie Mae has lenders that an applicant's credit profile did not change while the loan was in underwriting.  If the profile did change and the lender "misses" it, Fannie Mae can then refuse to purchase the loan for securitization, burdening the bank with loan on its books (and possibly a loss).

Therefore, it behooves banks to take each mortgage applicant's credit report in hand, and do a complete re-pull just prior to closing -- just to make sure nothing changed.

Banks wants Fannie Mae to buy their loans so they're looking at the re-pulled reports for evidence of any of the following events that might have occurred while the loan was in underwriting:

• Did the applicant apply for new credit cards?
• Did the applicant run up existing cards?
• Did the applicant finance an automobile, or other major purchase?

If the updated credit report doesn't match the original credit report, the mortgage is subject to a complete re-underwrite and a possible loan turndown.

The 3 Things An Underwriter Will Scrutinize

When banks re-pull credit just prior to closing, there are 3 things for which an underwriter is looking, and specific actions the bank will take.

What the bank will do: Recalculate debt-to-income ratios using your "new" minimum payment due figures. If the DTI exceeds Fannie Mae's maximum threshold, the loan will be denied.

What you should do about it: Don't run up credit cards prior to closing -- even for layaway items. Consider paying more than the minimum due, just in case.

What the bank will do: Use your new credit score to assess loan-level pricing adjustments or outright denials for when scores fall below Fannie Mae's minimum credit score requirement.

What you should do about it: Follow the basic rules of keeping your credit score high -- pay your bills, don't let things go into collection, and don't look for new credit unless necessary. myFICO.com has a terrific series on credit scoring you can review.

What the bank will do: Look at the Credit Inquiry section of your credit report to look for "non-disclosed liabilities". If items are found, the bank will ask for supporting documentation on the inquiry, and will use the information to re-underwrite your mortgage.

What you should do about it: Don't go looking for new credit until after your loan is funded.  Period.  Now re-read that first sentence, please, to help it sink it.

And remember -- this is all happening after your loan has reached "final approval" status.

Loan Approvals Are Tougher, But Not Impossible

Fannie Mae started its Loan Quality Initiative is to improve its loan pool's performance.  Better loan quality can help keep conforming mortgage rates down and reducing taxpayer burden from foreclosures simultaneously.  That's two big wins.

Unfortunately, the LQI will also lead to additional mortgage turndowns and a lot of busted closings.

Be extra careful with credit between your application date and your closing date, therefore.  If you must buy something big, think about paying cash.  Anything that goes on a card can be used as grounds for revoking an approval.

Even if your loan is cleared-to-close.

For help with your mortgage approval, or questions about the Loan Quality Initiative, . I am happy to walk you through it.

In February 2009, Fannie Mae rolled back a rule that kept real estate investors from financing more than 4 properties at a time.  The limit raised the maximum number of financed properties to 10.

The program provides bona fide investors with an avenue to add to their respective real estate portfolios.

Yes, You CAN Finance With 5-10 Homes

In its official announcement, Fannie Mae said upping the financed-property limit would help stabilize housing nationwide.

"Experienced investors play a key role in the housing recovery", it said.

15 months later, however, finding a bank that offers the 5-to-10 Properties Financed program is proving to be a challenge. Unlike the traditional 15-year fixed rate mortgage, most lenders are not offering the 5-10 Properties program as a matter of policy.

It's cause for consternation among the real estate investment crowd.  Fannie Mae says it will buy the loans; banks should be willing to do them.

Why Some Banks Won't Offer The 5-10 Properties Program

So, why don't all bank participate in the 5-to-10 Properties Financed program?

The probable answer is that underwriting a 5-property-owning investor's mortgage application is hard work.  "Traditional" homeowners submit for loan approvals with just a basic W-2 and paystub for an approval.  Bona fide real estate investors, on the other hand, submit for approval with complex tax returns, REO schedules, and a ton more details to reconcile and verify.

It's far quicker to underwrite and approve a standard loan as compared to a 5-10 Properties program loan. However, both loans are valued the same when bundled for Wall Street securitization.

In other words, the 5-10 Properties program is more work for same profit.  It's no wonder most banks don't do it.

Thankfully, a few of the nation's banks will.  You just have to know where to find them.

And you have to meet their guidelines.

The 5-10 Financed Properties Program Criteria

In order to purchase and finance a home through Fannie Mae with more than 4 existing financed properties, investors must meet all of the following criteria:

• Own between 5-10 residential properties with financing attached
• Make a 25 percent downpayment on the property; 30 percent for 2-4 unit
• Minimum credit score of 720
• No mortgage lates within the last 12 months on any mortgage
• No bankruptcies or foreclosures in the last 7 years
• 2 years of tax returns showing rental income from all rental properties
• 6 months of PITI reserves on each of the financed properties

For refinances, loan-to-value is capped at 70% for all property types.

And then, as a last step to reduce fraud, Fannie Mae's multiple property program requires applicants to sign a 4506-T -- a form giving lenders permission to verify your submitted-with-the-loan tax returns against the official, IRS-filed version of the same.

Where To Get A 5-10 Properties Program Mortgage

If you own more than 4 financed properties and want to purchase a new one, or refinance one you already own, let your first call be to your personal loan officer or bank.  Ask for help -- you can't know if your banks offers the 5-10 Properties program until you ask.

If that call gets you nowhere, you call me directly or .

I offer mortgages for investors with 5 or more properties financed. I'd be happy to get you started.

If you plan to mortgage your Cincinnati home with a Fannie Mae interest only product, get your loan application together no later than this Friday, June 18.

Interest Only Loans Unavailable?

Starting next week, Fannie Mae is putting major restrictions on the popular "interest only" loan product.  This follows Freddie Mac's earlier announcement to discontinue interest only loans entirely.

As a refresher, an “interest only” mortgage is exactly what its name implies — a mortgage for which the monthly payments consist entirely of interest with no principal due.

Interest only loans do not amortize, and because of that, mortgage payments are lower on a month-to-month basis.

For example, an amortizing, $417,000 mortgage at 5 percent carries a monthly cost of $2,339.  The same payment on a comparable interest only mortgage drops to $1,738.

That’s a payment difference of $601 -- a pretty big deal.

Not surprisingly, the size of the savings is why Fannie Mae is making its guideline change.

Interest Only Mortgages For Financial Management Only

In its official announcement, Fannie Mae says its interest only option is for “borrowers who are in a position to choose it as a financial management tool” and should not be for homeowners just looking for cheaper payments.

Beginning with applications dated June 19, 2010 or later, there are new minimum standards for interest only home loans.

• Applicants must have a FICO of at least 720
• Applicants must have at least 24 months of reserves
• The subject property may only be a 1-unit (i.e. condo, townhouse, single-family)
• The subject property must be a primary residence, or a vacation home

Additionally, cash out refinances are not allowed. Interest only loans are restricted to purchase and rate-and-term refinances only.

Where To Get An Interest Only Mortgage

Interest only home loans aren’t for everyone, but if it's your preference, your options are thinning.

As mentioned, Freddie Mac no longer offers them and Fannie Mae is getting tough. Thankfully, there's places besides Freddie and Fannie where you can "go interest only".  Namely, portfolio lenders.

A portfolio lender is like the anti-bank; a lender that holds loans for profit instead of selling them to Wall Street and portfolio lenders have an appetite for good interest only mortgages -- especially jumbo ones.

If you've been turned down for an interest only mortgage, or just want to know where to find one, call me or .

(Post adapted from Bring the Blog, a blog-writing service for loan officers and real estate agents)

Author's Note: Click here for a county-by-county loan limit list.

Conforming mortgages are appropriately named; they "conform" to the mortgage underwriting guidelines of Fannie Mae or Freddie Mac. Mortgages meeting these criteria are securitized on Wall Street as mortgage-backed bonds.

Since 2007, though, as mortgage performance has weakened, Fannie and Freddie's lending standards have tightened.  Today's would-be borrowers are asked to document more income, hold deeper reserves, and show higher credit scores.

One underwriting area that hasn't tightened, however, is the maximum allowable loan size.

Conforming Loan Limits Vary By Property Type

For the 5th consecutive year, the 1-unit conforming mortgage loan limit is $417,000.

As released by the Federal Housing Finance Agency, the official 2010 conforming mortgage loan size limits are, by property type:

• 1-unit properties : $417,000
• 2-unit properties : $533,850
• 3-unit properties : $645,300
• 4-unit properties : $801,950

Note, however, that maximum conforming loan limits vary by market.

Conforming Loan Limits Vary By ZIP Code

Counties in which "typical" home prices dwarf the conforming loan limits are declared "high-cost" areas. Each is assigned a local conforming loan limit that ranges up to $729,750.

For example, a home in Denver, Colorado is capped conforming at $417,000 but a home in Snowmass, Colorado gets clearance to $729,750. Even condos.

The same is true for Mason, Ohio as compared to Athens, Ohio.  Mason's maximum loan size is $417,000.

In Athens, it's $432,500.

Unfortunately, for homeowners in Chicago, there is no break whatsoever.  Chicago's tony neighborhoods -- Lake Forest, Lincoln Park, Hinsdale and elsewhere -- are stuck at $417,000. This is because each of the Chicagoland counties are a melange of housing types and socioeconomic class.

Neither Lake County, Cook County, Dupage County, nor any of the collar counties are considered high-cost.  None has a sufficiently high median sales prices to justify it.

What To Do If Your Mortgage Is "Jumbo"

There are 197 designated high-cost areas in the U.S. and that's just 6% of the country. Most people, therefore, are subject to the 2010 conforming loan limit of $417,000.

If your mortgage exceeds the local loan limit, your mortgage is often called "jumbo" or "super jumbo". The good news is that jumbo and super jumbo mortgages are plentiful -- you just have to know where to look.  And it's not at Fannie Mae.

I lend on jumbo and super jumbos. .

My longtime readers are familiar with the proverbial Mortgage Rate Roller Coaster. It's my way of explaining how mortgage rates rarely move in a straight line.  Some days up, some days down, every day unpredictable.

See for yourself how volatile rates can be.

Mortgage Rates Can Make You Nauseous

In this true-to-life mapping, ride the coaster as it plots the Fannie Mae 5.0% bond against a wooden-frame rail track, beginning on November 25, 2008 and ending March 31, 2010.  This period represents the time during which the U.S. government spent $1.25 trillion to keep mortgage rates low.

During that period, conforming 30-year fixed rates carved out a range of 1.75 percent and changed up to 5 times per day.

The Fed's Buyback Program Worked (For Now)

Insiders estimate the Fed's program lowered mortgage rates 1 percent. Other factors may have helped them fall more. Rates peaked in June 2009 and bottomed in November 2009. Today, 30-year fixed conforming rates are approximately 1.125 percent lower than when the mortgage buyback program started.  ARMs are even more improved.

The Mortgage Rate Roller Coaster is 100% built-to-scale.

You Should Know When To Lock Your Rate

I'm an active loan officer and I am licensed to lend in the majority of the United States. If you have questions about mortgage rates, mortgage rate volatility, or timing your upcoming rate lock, to send me an email.

I answer all my mail and look forward to helping you.

Mortgage rates are low today, but maybe not for you, specifically.

If you've ever wondered why loan officers can't give you the best "advertised rate", it's not because of a bait-and-switch scheme or something worse.  Most likely, you're being quoted higher mortgage rates because of a government mandate called Loan-Level Pricing Adjustments.

Defining Loan-Level Pricing Adjustment

LLPAs are changes in loan costs based on your personal risk traits.

Fannie Mae and Freddie Mac first introduced loan-level pricing adjustments in April 2008 and they've been a cause of consternation among conventional borrowers since.

Loan-level pricing adjustments tend to surprise people because it's not exactly a Prime Time News-type story; the first time most people hear about LLPAs is at the point of application. A loan-level pricing adjustment can raise an applicant's mortgage rate by a full percentage point or more.

How Are LLPAs Determined

To get deep on LLPAs how they work, let's first talk about auto insurance.

For all of us, there is some base insurance rate for which we all qualify.  It's based on our age, our credit and the ZIP code in which we park the car.  From there, however, adjustments are made -- drive a riskier car, pay a higher premium.  Have a history of accidents, pay a higher premium. Things like that.

The same goes for mortgage loans -- the more the risk, the higher the rate. This is LLPA, defined.

A few of the risk factors that can change a person's mortgage rate include:

• Living in a condo with less than 25% equity in the home
• Having a credit score of less than 740
• Living in a 2-unit, 3-unit or 4-unit home
• Using a home as an investment property
• Doing a "cash out" refinance with less than 40% equity in the home
• Having a second mortgage to subordinate

Each of these traits -- historically -- increases the likelihood of your default.    Therefore, to hedge, Fannie Mae and Freddie Mac charge one-time, pre-set fees to offset a potential future loss.

LLPAs Are Not Discretionary Fees

LLPAs are not discretionary fees; sources of profit or padding.  Nor are they junk fees.  LLPAs are mandatory costs triggered by specific loan characteristics.  There's no flexibility, either.  If you trigger the guidelines, you pay the fees.

The Fannie Mae Loan-Level Pricing Adjustment chart is as thorough as it is punitive. At least borrowers get to choose how they pay them:

1. LLPAs can be paid as a traditional "closing cost", due at closing.
2. LLPAs can be built into an interest rate. In general, interest rates increase 0.250% for each 1 percent of loan-level pricing adjustment.

It doesn't take much to trigger the risk-based pricing of Fannie Mae and Freddie Mac; a lot of conforming mortgage applicants do it.

What To Do If You Trigger LLPA

If you've triggered the LLPA chart and want to know your options, call or . Depending on your loan traits, there may be non-government programs that can give the same great rates as Fannie and Freddie, but without the risk fees.

Be sure to ask me about it.  I answer all my own emails and would be happy to help you however I can.

Mortgage approvals are getting more difficult.  Again.

After reviewing recent unemployment data and market fluctuations, plus patterns of mortgage fraud, Fannie Mae is making major mortgage guideline changes for the first time in more than 6 months.

The changes are broad, impacting 15 separate areas of the mortgage approval process as detailed in Fannie Mae's official announcement.

Across-the-Board Guideline Changes:

• Credit, income and asset documentation can't be more than 90 days old. The former guidelines allowed for 120 days.
• Lenders must compare actual federal tax returns from the IRS to a borrower's supplied income documentation. Previously, this review step was at the lender's discretion.
• "Tip" income must be verified.
• Trailing secondary wage earning is now prohibited. This means that P&G employees relocating to Cincinnati can't use a spouse's "expected" Cincinnati income until that spouse actually has a job.
• Stocks, bonds and mutual funds get assigned 70% of current market value. Formerly, this was 100%.
• Retirement assets get assigned 60% of current market value. Formerly, this was 70%.

By themselves, these bullet points would kick more than a handful of home loans out of the underwriting queue but of all the changes Fannie Mae is making, the most impactful one may new its new restrictions on mortgages for 2-unit properties.

Until now, Fannie Mae had treated duplex homes as somewhat "safe", granting them the same liberal underwriting policies as for a single-family home.  Because of defaults and fraud prevention efforts, though, Fannie Mae decided to make getting approved for a 2-unit property decidedly more difficult.

Minimum credit scores are higher and maximum loan-to-values are lower.

When your 2-unit is your Primary Residence:

• Purchase: Maximum LTV lowered to 80%; 640 minimum FICO.
• Rate-and-Term Refinance: Maximum LTV lowered to 80%; 640 minimum FICO.
• Cash Out Refinance: Maximum LTV lowered to 75%; 680 minimum FICO.

When your 2-Unit is an Investment Property

• Purchase: Maximum LTV lowered to 75%; 660 minimum FICO.
• Rate-and-Term Refinance: Maximum LTV lowered to 75%; 660 minimum FICO.
• Cash Out Refinance: Maximum LTV lowered to 70%; 680 minimum FICO.

Overall, Fannie Mae's new 2-unit guidelines restrict loan-to-value limits by as much as 15 percent and raise minimum FICOs by up to 40 points -- 2 major shifts in policy.  Because of it, going forward, fewer 2-unit mortgage applicants will qualify for mortgages and that should slow both purchase and refinance activity in the 2-unit market until the market returns to balance.

It's especially tough for owners of more than 4 financed properties.

Fannie Mae has said September 1, 2009, is the "effective date" for its underwriting changes so not every lender is underwriting to the new rules just yet.  It's expected that by August 1, all of them well.

Therefore, if you know that you have a 2-unit home to refinance, or that you need your stock and/or retirement portfolio to qualify for your mortgage, consider moving up your timeframe to the next two weeks.   Lenders often implement new guidelines without advance warning and that could leave you in the cold.

Better to get a good rate today than to be ineligible for a great rate tomorrow.  If I can help you plan for an upcoming mortgage, call or email anytime.