Many minority and low-income families have a hard time qualifying for home mortgages because they do not have a traditional credit score. But this situation may be changing due to new mortgage underwriting rules introduced this year by Fannie Mae.
These new rules are designed to help encourage homeownership among creditworthy individuals and families who haven’t been able to qualify for a mortgage under traditional underwriting standards. The rules will allow mortgage lenders to consider nontraditional credit data from borrowers, such as rent payments and utility bills, as well as income from nonborrower household members, when making mortgage lending decisions.
Changing marketplace dynamics
“The new Fannie Mae mortgage lending rules reflect the current dynamics of the homebuyer marketplace,” said Tom Booker, managing director of The Collingwood Group, LLC, a Washington, D.C.-based business advisory firm. “The dynamics of income and credit have changed since the financial crisis. We need a rational and responsible way for people with less-than-pristine credit but who still have the financial wherewithal to buy a home to qualify for a mortgage. I applaud Fannie Mae for being innovative in this regard.”
A report released by the Consumer Financial Protection Bureau last year found that about 45 million Americans do not have a traditional credit score. A large percentage of these individuals are African-American, Latino, low-income and young people.
What’s more, 26 million of them are “credit invisible,” meaning they have no current credit files with one of the three major credit reporting agencies. The remaining 19 million are “credit thin,” which means they don’t have enough credit history for a traditional credit score to be generated.
“Our aim is to help lenders serve their customers efficiently so that more qualified borrowers have access to mortgage credit,” Fannie Mae President and CEO Timothy Mayopoulos said in a statement announcing the new rules. “Our goal is to make sustainable homeownership a reality in communities across the country while reducing risk for taxpayers.”
HomeReady broadens income guidelines
Under the HomeReady program from Fannie Mae, lenders may consider in their underwriting criteria the income of individuals who will live in the home but who aren’t listed on the mortgage loan. This could include an employed parent, adult child or other relative. In addition, lenders can consider rental income from an attached dwelling such as a basement or garage-top apartment as part of their income calculations.
Other components of HomeReady include the following:
• Borrowers may qualify for mortgages with as little as a 3% down payment. Previously, a minimum down payment of 5% was usually required.
• Debt-to-income ratios of up to 50% may be considered; the normal debt-to-income ratio limit is 45%.
• Borrowers are required to complete an online education course called Framework, which costs $75.
• In some instances, the income of a family member who will not live in the home can also be considered as part of lenders’ underwriting criteria.
Andrew Wilson, director of media relations for Fannie Mae, said Fannie Mae also has expanded the capabilities of its Desktop Underwriter automated underwriting system. This will make it easier for lenders to underwrite nontraditional credit. “Previously, lenders had to do this underwriting manually, so it will now be easier for them to include nontraditional credit in their underwriting process,” Wilson said.
Credit union lenders welcome the new rules.
“We support this move because there are a number of credit union members who don’t have traditional credit, or their FICO score doesn’t tell the whole story,” said Alicia Nealon, director of regulatory affairs for the National Association of Federal Credit Unions. “Using Desktop Underwriter makes the process more routine for loan officers, and it’s faster and there’s less potential for errors than with manual underwriting.
“This is a big benefit for credit unions that work with low- and moderate-income borrowers seeking to purchase or refinance a home. It’s a real win for the industry and consumers.”
New repurchase framework
In addition, Wilson said Fannie Mae has made some recent changes to give lenders more clarity and certainty about their potential risk should they have to repurchase loans they made to borrowers who didn’t have traditional credit scores.
“Some lenders were limiting loans to these borrowers due to concerns about their repurchase liability for loans that didn’t meet Fannie Mae’s standards,” Wilson said. “In making these changes, we’re trying to encourage lenders to remove or reduce restrictions on mortgage loans they make to these kinds of borrowers.”
Booker called the new Fannie Mae mortgage underwriting rules a “market expansion effort.”
“These are substantive ways of thinking about credit differently that will lead to more Americans getting access to the housing market,” he said. “The new rules are a very positive development for our industry.”
Freelance writer Don Sadler contributed to the writing and research of this article.