Fannie Mae DU 7.0 is here, Lower Risk Lower Rate

Fannie Mae Desktop Underwriter 7.0 is here!

In order to approve most mortgage loans, bankers submit their client’s loan application to Fannie Mae’s computer underwriting software.  Desktop Underwriter or DU is the name of the underwriting engine.  DU calculates all of a client’s risk factors to see if they are a good candidate for lending.  As I always say the lower the risk, the lower the rate!  In the newest update to DU certain risk factors are now considered higher risk than before.  This means that is will be even harder for most people to be financed and not possible for many.  Below are the highlights of tightened underwriting policy.

• Mortgage Insurance will no longer be considered a risk factor.  DU previously considered the presence of Mortgage Insurance as lower risk.  The amount of equity or down payment is still one of the highest weighted risk factors.

• Purchase vs. Refinance.  Purchases are still considered lower risk than refinances.  DU did factor in the unpaid principle balance [the amount you currently owe] increasing as higher risk.  Now DU will look only at the amount of cash-out when weighing risk.  Cash-out Refinances are higher risk than Limited Cash-out refinance [refinances the just lower your rate or term].

• Loan Term.  DU considers shortening a mortgages term as a good risk.  Fannie will continue to consider a shorten term lower risk, but no longer groups it with Loan to Value.

• Loan Type.  Interest Only Mortgages are now considered much higher risk then normal amortizing loans.  The new order of RISK is 30-5 Year Fixed Rate, 5-10 Year Adjustable Rate, 6m-3 Year Adjustable Rate and Interest Only Fixed Mortgages, and lastly Interest Only ARM’s and Balloon Mortgages.

• A Minimum Credit Score of 580 is required.  As long as Mortgage Insurance was not an issue, lower credit scores were allowed on Fannie Mae Refinances and Purchases.  Now 580 is the floor.

• Property Type.  Property Type has become a higher risk factor in today’s market.  Condos are higher risk than once thought.  The new RISK order is Single Family properties not in a co-op or attached, Attached Condominiums and Two-Unit properties, Three to Four Unit homes, then lastly Manufactured Homes.

• Self Employment is no longer considered a risk factor.

• Expense Ratio.  Clients could approve up to 65% Debt to Income previously.  Now debt ratios above 45% will be difficult to approve.

• A Previous Foreclosure used to prevent clients from buying for 2 years.  Fannie Mae now requires 5 years out of foreclosure before being able to approve for financing.

Fannie Mae has been trying to clean up its mortgage portfolio ever since the Mortgage Crisis started.  These updates are the next step in lowering their overall risk.