Fannie Mae Toughens Guidelines On 2-Unit Homes, Trailing Spouses And Retirement Portfolios

July 20, 2009 - 2 min read

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.

For homeowners with owner-occupied 2-flats (i.e. live in one unit, rent the other), the new guidelines by transaction type are:
Dan Green
Authored By: Dan Green
The Mortgage Reports contributor
Dan Green is an expert on topics of money and mortgage. With over 15 years writing for a consumer audience on personal finance topics, Dan has been featured in The Washington Post, MarketWatch, Bloomberg, and others.