Changes to Declining Markets Policy

Over the past month or so Fannie Mae and Freddie Mac have made a few announcements regarding maximum loan levels. For some odd reason I didn’t post these changes as they were announced. Perhaps I was distracted by other things going on. So, I want to share with you some of the major changes which have been announced recently and how it could affect your situation for obtaining a home mortgage loan.

The really major change is regarding declining markets. As you may or may not be aware the term declining markets entered our lexicon late last year. In fact I even wrote a post suggesting that while “subprime” may have been the word of the year for 2007, “declining markets” has a good chance of being the word of the year for 2008. The reason being that because Fannie and Freddie (along with mortgage insurance companies) announced that they would be automatically cutting 5% off the the maximum loan to value on any property determined to be in a declining market. Now Arizona has been deemed a declining market, so it affects all loans in this great state of ours.

What does this mean to you? Well all Fannie and Freddie loans cap out at 95% which means the borrower needs to put 5% down from his/her own funds. This maximum loan amount was cut back to 90% in declining markets. Which meant the borrower no had to put 10% down for the same loan.

Recently Fannie and Freddie have made some changes stating that they would allow 95% loans again. The problem is finding mortgage insurance companies willing to insure mortgages up to that high of a loan to value. We have developed a relationship with such a mortgage insurance company. Hence, moving forward we are able to do loans upto 95% under the following conditions:

  • Fixed rate programs only (fully amortizing)
  • $417K max loan size
  • Primary residence only
  • Purchase or rate and term refinance (no cash out refinances allowed)
  • 680 minimum credit score

This is only part of the full set of guidelines, therefore it is important to review this completely with your lender. So I will forewarn you that not all will qualify for this new higher loan to value. Additionally this is a lender specific policy, different lenders have different risk tolerance and relationships with different mortgage insurance providers. Do not take this as an industry wide guideline.

The other changes announced are regarding loan to value for investment properties and cash out transactions. But due to the fact that the Phoenix market is designated a declining market, the changes do not really affect anything for loans here. Meaning our terms are already more strict and we are required to follow the more stringent guidelines when making an underwriting decision.

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