Last Tuesday (June 30th) was a really big day in the lending community. It’s not often that the agencies (Fannie Mae, Ginnie Mae and Freddie Mac) implement changes that actually make loans easier to qualify for and reduce the amount of paperwork that borrowers have to fill out as part of the loan process. This is why the changes made by Fannie Mae this week–of which accomplish both of the aforementioned things–are so significant. Fannie Mae announced a total of 13 policy changes last Tuesday, three of which are particularly beneficial to the lending industry. Below is a summary of these changes and the positive impact each will have.
▸ Previously when a borrower converted their current primary home to a second home or investment property and in turn purchased a new primary residence Fannie Mae required 6 months reserves for not only the residence they were “converting” but also for the residence they were purchasing. This policy was imposed during the height of the financial crisis and was implemented to ensure borrowers had adequate capacity and financial reserves to successfully manage multiple residences (i.e. primary residence and second home and/or investment property). This requirement has now been eliminated specifically for the conversion of a principal residence to a second home or investment property. This is a massive change and one that will impact thousands of current and soon to be homeowners.
▸ In the past Fannie required proof of liquidation of stocks, bonds and mutual funds should those funds be used as the borrower’s source of a down payment. The process of obtaining the proper documentation was cumbersome and challenging at times. In connection with this Fannie only allowed lenders to use 70% of the vested amount as assets. This has now changed. Should the borrower have at least 20% or more funds than what is necessary for the down payment, we, as the lender, are no longer required to document liquidation. Additionally, 100% of the asset’s value can be used when determining the borrower’s available reserves.
▸ The third and most important change has to do with un-reimbursed employee business expenses (also known as 2106 expenses). For borrowers that are salaried and also receive a bonus, overtime pay, and/or commission income, as long as the salary portion accounts for at least 75% of their total annual income (or in other words, as long as any bonus, overtime pay, and/or commission income accounts for 25% or less of the borrower’s total annual income), un-reimbursed business expenses are no longer counted against them.
As always please consult a qualified mortgage professional so you know how these changes impact you and your ability to qualify for a loan or provide less paperwork.
Thanks for reading!