How Does The Latest Version Of Fannie Mae’s DU Affect You?
Posted by Kevin Kueneke | Visited 247 times, 1 so far today | Currently 1 Comment »
For Conventional conforming loans, lenders use one of two automated underwriting engines. Fannie Mae has Desktop Underwriter, otherwise known as DU. Freddie Mac has Loan Prospector, otherwise known as LP.
Prior to being reviewed by an actual underwriter, a loan must be run through one of these automated underwriting engines. The programs evaluate the information provided (income, assets, credit report, layers of risk, etc.) and determine whether or not the loan meets current Fannie/Freddie guidelines. If a loan does not pass this initial step, it cannot move forward.
Up to this point, Fannie Mae has not really had a set maximum debt-to-income ratio. A buyer could be approved with as much as 59% of their gross monthly income going towards their expenses (housing, cars, student loans, credit cards). A few years ago, that number could go up to 65%.
However, the latest version of Fannie’s engine, DU 8.0, will now have a soft debt ratio ceiling of 45% and a hard ceiling of 50%. Greater than 45% will be allowed if and only if there are compensating factors to rationalize the higher debt ratio.
What are compensating factors?
- Very high credit scores (greater than 760)
- Very large down payment (30-50% down payment for example)
- Large amounts of reserves (12+ months housing payments in the bank after the close of escrow)
- Long time on job (10+ years)
A survey of some of the larger lenders shows that more than 22% of all conventional loans in process right now have a debt ratio greater than 45%. More than 12% of all conventional loans in process have a debt ratio greater than 50%.
So, now what? If you are involved in a transaction right now, check with the lender to see if the loan will be affected by the tighter guidelines. Most lenders have a “pipeline protection” policy that will grandfather many loans, but not all.
Sometimes, an underwriter will re-calculate income differently than initially calculated and will then require that a loan be re-run through DU. If a loan is DU approved this week, but not actually reviewed by an underwriter until next week, that loan may not work under the new guidelines.
Please keep in mind that Freddie Mac has not tightened their LP program yet, so a loan that no longer fits under Fannie rules might still work under Freddie. However, not all lenders offer Freddie Mac products. Another reason to check with your lender.
By the way, for High Balance Conforming loans (a.k.a. Agency Jumbo, Conforming Jumbo, Jumbo Conforming), the maximum debt-to-income ratio is and always has been been 45%.
Any questions? Please feel free to call me at (760) 500-1919 or email me: Kevin@MyCWMtg.com
Well-written and timely piece on important changes to conventional financing.