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You Need to Know About This Change If You’re Applying for a Mortgage Soon

May 23, 2016
by Susan Shain
Senior Writer

Thinking about buying a house this summer?

You might want to wait on applying for a mortgage until June 25, when some pretty significant changes are set to go into effect. For first-time homebuyers and people with no credit, those changes could make buying a home a whole lot easier.

Fannie Mae — one of the country’s biggest mortgage underwriters — is shaking things up. Here’s what you need to know…

Why Getting a Mortgage Might Get Easier (for Some)

Fannie Mae is making changes to Desktop Underwriter (DU), a program used by mortgage lenders to assess risk.

When you visit a mortgage lender, they input information about the home you’re purchasing and your finances into this program. Within minutes, you get an approval or denial.

“While the lender always makes the final decision, getting a home loan approval from Fannie or Freddie is as close as you can get to sealing the deal,” NerdWallet explains.

“If you don’t get that stamp of approval, you’ll have to go through a manual loan approval process, which most lenders try to avoid.”

And for the first time in 27 years, Fannie Mae is updating the data it considers.

Here are four changes that caught my eye:

1. Your Credit History Will Be More Robust

Old Way: Your credit history only included “the outstanding balance, utilization and availability of credit,” and whether you were “on time or delinquent on existing credit accounts.”

New Way: “Trended credit data” will now be included, which factors in “balance, scheduled payment and actual payment amount” over the past 24 months.

Translation: Instead of just looking at your current situation, DU will assess your credit history over the past two years.

Borrowers who use little of their available credit and regularly pay their balance in full will be considered lower risk than borrowers who use a lot of their available credit and only make the minimum payments.

“This trended credit data is not going to make or break anyone,” Fannie Mae senior product manager Mindy Armstrong told NerdWallet.

But, for borrowers hovering between an “approve” and “decline,” a history of paying your bills in full could help you get approved. However, it won’t get you a better interest rate.

Just another reason to pay off those cards in full each month!

2. First-Time Homebuyers Aren’t Considered Higher Risk

Old Way: People who already had a mortgage were viewed as less risky than first-time homebuyers.

New Way: “DU will no longer view borrowers with no mortgage history as a higher risk than those who have had mortgage obligations,” according to Fannie Mae.

Translation: This is great news if you’re a first-time buyer — it means DU will look at how you manage other types of debt, like car payments and student loans.

3. Borrowers Without Traditional Credit Can Get Automated Approval

Old Way: Borrowers without traditional credit had to be manually approved.

New Way: If you don’t have a traditional credit history, and your home purchase meets several qualifications, you can get an automated approval like everyone else. DU will assess factors like your equity and loan-to-value ratio, liquid reserves and debt-to-income ratio.

Translation: Borrowers without traditional credit are now eligible for automated approval, making the process easier and faster.

“Millennials who haven’t utilized credit in the past but can show a history of making other payments on time, like cell phone and insurance payments, may now find the door open for conventional loans,” Quicken Loans vice president Bill Banfield told NerdWallet.

Woohoo!

4. Self-Employed People are Viewed as Higher Risk

Old Way: Self-employed people were viewed the same as salaried employees.

New Way: Self-employment will be considered a risk factor. “Research has shown that self-employed borrowers tend to default on their mortgages more often than salaried borrowers, when all other risk factors are held constant,” Fannie Mae explains.

Translation: If you’re self-employed, you might want to get your application in before the new changes go into effect — so your career won’t make you appear riskier.

Want more tips for buying a home? Check out these posts:

Your Turn: Will you apply for a mortgage before or after the change?

Susan Shain, senior writer for The Penny Hoarder, is always seeking adventure on a budget. Visit her blog at susanshain.com, or say hi on Twitter @susan_shain.

by Susan Shain
Contributor for The Penny Hoarder

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