By Realty Times
The Federal National Mortgage Association, also known as Fannie Mae, recently changed its requirements for mortgage qualification. Now, first-time homebuyers will have their history of rent payments included in their determination of loan eligibility.
Does Fannie Mae Matter To Your Mortgage?
Fannie Mae is a corporation sponsored by the federal government. Fannie Mae ensures lending institutions have the money needed to lend to homebuyers. Fannie Mae buys mortgage loans from financial institutions like banks and credit unions. Then, the financial organization can use that cash to issue new mortgages.
Fannie Mae will keep the loans they buy as part of its portfolio or bundle them into mortgage-backed securities. Mortgage-backed securities are publicly traded through investment exchanges, similar to stocks. To reduce the likelihood of acquiring loans that can’t be repaid, Fannie Mae has set minimum requirements on the loans it will buy, as does the Federal Housing Finance Agency (FHFA).
Since lenders like to know they can sell their loans to Fannie Mae, most commercial lenders will either follow or exceed the minimum lending requirements set forth. When a mortgage follows Fannie Mae’s requirements, it’s known as a conforming loan.
Factors required for approval of a conforming loan include a FICO score of 620 or higher and a debt-to-income ratio of 45-50%. You need the ability to make a down payment of 3% or more of the loan amount.
There are also limits for individual counties for loan amounts. In much of the country, for example, the 2021 maximum conforming loan amount is $548,250.
Will the New Lending Standards Help or Hurt First-Time Buyers?
For first-time buyers, in particular, it can be a challenge to meet conforming loan requirements. The minimum credit score can be a big hurdle to buying a home if you have limited credit.
As of September 2021, it may be easier for first-time buyers, however.
Borrowers applying for conforming loans can give lenders access to their bank accounts. Then, the automated Desktop Underwriter system used by Fannie Mae can take into account rent payment history.
If you have a history of making on-time rent payments, it can show you’re a reliable borrower. If you have a history of missed or late payments, it can’t hurt.
According to data analyzed by Fannie Mae, 17% of mortgage applications denied by the Desktop Underwriter in the past three years would have been approved had rent history been included.
To take advantage, you have to be a first-time homebuyer financing a home that will be your primary residence. You’ll need a credit score of at least 620, and you have to have been making monthly rent payments of at least $300 for a minimum of 12 months. You also need a bank account you can use to show those payments.
Changes in Credit Score Calculations
Fannie May also announced changes in how it deals with multiple applicants’ credit scores in determining mortgage eligibility. Now, Fannie Mae is directing lenders to get two or three scores per lender. If there are two scores, then the lower of those two is the representative score. If three scores are used, the middle one is the representative score.
Before this change, if you applied jointly for a conforming mortgage with another borrower, the lower of your scores was used to determine eligibility. That meant if either of you had a score below 620, you were denied.
The revised calculation and the inclusion of rent payments are meant to expand financing opportunities for people with limited credit histories.
The Chief Executive Officer of Fannie Mae spoke out about the changes saying they wanted to help renters who otherwise thought they’d never be able to achieve homeownership.