Though it hasn't attracted much attention, Fannie Mae has issued new lending guidelines effective Sept. 1 that will significantly influence how home mortgages are written.

While some of the changes primarily affect how information is reported in issuing a home loan or mortgage refinance, some will affect consumers directly. In particular, the new rules will make it harder to get a home loan or mortgage refinance for people whose earnings depend on tips, who are counting on a spouse's income to help pay the mortgage in a new community and who are depending on their assets to help them qualify for a mortgage.

The changes are largely due to concerns over the current economic instability, rising unemployment, concerns over increased mortgage frauds in a down economy and to address specific situations that caused problems in the current downturn.

Only partial value of assets will count

Perhaps the biggest change, at least from a consumer standpoint, is that stocks, bonds and mutual funds counted as reserves for purposes of obtaining a mortgage or refinance will only be valued at 70 percent of their current value. Current rules allow the full value to be counted toward reserves, but the recent sharp declines in the stock market and other investments have led Fannie Mae to adopt a much more conservative policy on valuation. Retirement assets may be counted at only 60 percent of current value.

Persons who are taking a job in a new community and buying a home there will no longer be able to assume that their spouse will also be able to get a job there and count those projected earnings for purposes of underwriting the mortgage. Called trailing secondary wage earner income, the change will likely make it much more difficult for professional couples transferring to a new community to obtain a home in the price range they are accustomed to. Many will need to scale back their expectations or become renters temporarily until the "trailing" earner is once again employed.

Tip income needs to be documented

Waiters and other workers who depend on tips for a large part of their income will have to document those earnings in order to have them considered under a mortgage application. Previously, the guidelines set no requirements for documenting tip income; now, potential borrowers must now have their tip income verified over the past two years, as well as be certified by the borrower's employer that it will likely continue.

On the upside for consumers, borrowers will now be allowed to use a credit card to pay certain fees outside of closing and early in the mortgage process, such as appraisals, origination, credit reports and the like. The credit card charges need be paid off by closing. Borrowers will still be prohibited from using a credit card for part or all of their down payment financing, however.

Rules for two-unit purchases tightened

The new rules also tighten requirements for the purchase of two-unit properties, either as a primary residence or strictly as a investment, requiring considerably larger down-payments and higher credit scores. On certain two-unit properties where a 95 percent loan -to-value was previously allowed, the new limits have been reduced to 75-80 percent.

Other rule changes impose shorter timelines for filing certain types of paperwork, and requiring a lender to obtain actual copies of a borrower's tax returns to verify income, rather than leaving it to the lender's discretion.

It is not yet clear whether Fannie Mae's sibling lender, Freddie Mac, will adopt similar rules. Because the two government-backed lenders back about 80 percent of all U.S. home mortgages through purchases on the secondary market, policies adopted by either of the two megalenders are more or less mandatory for direct lenders who initiate home mortgages.

Published on August 26, 2009