Conventional Loan Blessing, or Much Ado About Nothing?
Recently, there's been a lot of talk about Fannie Mae's increasing debt-to-income threshold, along with changes to credit reporting that should reduce the number of folks effected by judgments and liens when it comes to a mortgage application. This is being promoted as big news across a wide spectrum of housing news outlets, and for good reason - from 2008 through 2015, there was little, if any, positive news coming from the mortgage world. Loans were getting tougher to get, guidelines were stiff, many people were denied, and the stack of documentation to get a loan was getting bigger and bigger.
These days, things are a little different. Guidelines have loosened some, there are more 'common sense' measures in place, and technology has reduced the amount of paperwork to get a loan to 'next to nothing' for well qualified and salaried borrowers.
While any positive news certainly is news, fact is twofold with regard to this news: Both FHA loans and conventional loans already allow for debt-income ratios (DTI) to reach 50%. VA loans also allow much higher DTI ratios as they rely on DTI and the residual income of a borrower when qualifying. In the conventional world, until the changes at Fannie Mae are implemented, loans only had to be sent to Freddie Mac and their LP automated underwriting system for approval up to 50% DTI.
Also, DTI isn't the only factor that influences an automated approval through Fannie or Freddie - the automated systems are set up to analyze all borrower and property data input in it's entirety. Freddie Mac's LP underwriting system typically only grants approval with a high DTI if the rest of the borrower's file is very strong. The typical approval at 50% DTI will be someone with a decent sized down payment or equity in their home, a high FICO score, and some money in the bank as reserves. I don't expect the model Fannie Mae implements to be much different.
The 2nd piece of news focuses on the removal of many judgments and liens from consumer credit reports. While this will be a nice change toward getting things right for consumers (which, frankly, the credit bureaus don't put enough effort into), it is also unlikely to be a game changer. Title reports and 3rd party data verification systems will still stumble upon outstanding liens and judgments that may have to be paid prior to a mortgage applicant obtaining a mortgage. As for incorrect data and negative income that will be removed, lenders are already in a position to remove those items and adjust borrower FICO scores through credit tools such as "rapid rescoring", where an error is documented, corrected, and adjusted on credit, which is a process that usually takes only between 1 and 2 weeks.
One very bright spot for people that will see improvements to their credit will come in the form of improved FICO scores, which should result in better rates on mortgage loans since mortgages factor a borrower's FICO into the offered rate. Some people may see a large increase, and others will see a very nominal increase as other factors in their credit history will play a big role in how large or negligible the score change will be.
Overall, the changes at Fannie & the credit agencies are a bright spot, and a sign that things continue to trend in the favor of consumers and home buyers, but the changes shouldn't be seen as ground breaking events that will have hoardes of today's declined loan applicants turned immediately into approved applications. Rather, it's a small step in the right direction, which is exactly the type of step that should be taken over and over until the marketplace makes sense. After all, 2008 wasn't all that long ago...